cnmv bulletin quarter iii 2011 · quarter iii/2011 13 1 executive summary • the pace of the world...

CNMV BULLETINQuarter III

2011

Qu

arter III 2011

CN

MV

BU

LLET

IN

EN

CLOSED

CD

CNMV Bulletin

Quarter III2011

The CNMV publishes this Quarterly Bulletin to spread studies in order to contribute to the best knowledge of the stock markets and their regulation.

The opinions in these articles are the sole responsibility of the authors and they do not necessarily coincide with those of the CNMV.

The CNMV distributes its reports and publications via the Internet at www.cnmv.es.

© CNMV. The contents of this publication may be reproduced, subject to attribution.

ISSN (Printed edition): 1887-8458

ISSN (Digital edition): 1988-253X

Depósito legal: M-20083-2008

Layout: Composiciones Rali, S.A.

Printing: Artegraf, S.A.

http://www.cnmv.es

I Securities markets and their agents: situation and outlook 9

II Reports and Analyses 65

Return on Spanish investment funds: an analysis of its determinants 67

Mª Isabel Cambón Murcia

The use of ratings in financial regulation: measures and proposals 85

Ramiro Losada López

III Regulatory Novelties 99

Modifications to the securities market as a result of the Sustainable 101

Economy Act

Adela Aguilar, Fernando Ibáñez and Ángel Domínguez

European Securities and Markets Authority 121

Josefina Munuera Cebrián and Ángeles Martín de Diego

IV Legislative Annex 145

V Statistics Annex 153

Table of contents

Abbreviations

ABS Asset Backed SecuritiesAIAF Asociación de Intermediarios de Activos Financieros (Spanish market

in fixed-income securities)ANCV Agencia Nacional de Codificación de Valores (Spain’s national numbe-

ring agency)ASCRI Asociación española de entidades de capital-riesgo (Association of Spa-

nish venture capital firms)AV Agencia de valores (broker)AVB Agencia de valores y bolsa (broker and market member)BME Bolsas y Mercados Españoles (operator of all stock markets and financial

systems in Spain)BTA Bono de titulización de activos (asset-backed bond)BTH Bono de titulización hipotecaria (mortgage-backed bond)CADE Central de Anotaciones de Deuda del Estado (public debt book-entry tra-

ding system)CCP Central CounterpartyCDS Credit Default SwapCEBS Committee of European Banking SupervisorsCEIOPS Committee of European Insurance and Occupational Pensions Supervi-

sorsCESFI Comité de Estabilidad Financiera (Spanish government committee for

financial stability)CESR Committee of European Securities RegulatorsCMVM Comissão do Mercado de Valores Mobiliários (Portugal’s National Secu-

rities Market Commission)CNMV Comisión Nacional del Mercado de Valores (Spain’s National Securities

Market Commission)CSD Central Securities DepositoryEAFI Empresa de asesoramiento financiero (financial advisory firm)EBA European Banking AuthorityEC European CommissionECB European Central BankECLAC Economic Commission for Latin America and the CaribbeanECR Entidad de capital-riesgo (venture capital firm)EIOPA European Insurance and Occupational Pensions AuthorityEMU Economic and Monetary Union (euro area)ESMA European Securities and Markets AuthorityESRB European Systemic Risk BoardETF Exchange traded fundEU European UnionFI Fondo de inversión de carácter financiero (mutual fund)FIAMM Fondo de inversión en activos del mercado monetario (money-market

fund)FII Fondo de inversión inmobiliaria (real estate investment fund)FIICIL Fondo de instituciones de inversión colectiva de inversión libre (fund of

hedge funds)FIL Fondo de inversión libre (hedge fund)FIM Fondo de inversión mobiliaria (securities investment fund)FSB Financial Stability BoardFTA Fondo de titulización de activos (asset securitisation trust)

FTH Fondo de titulización hipotecaria (mortgage securitisation trust)IAASB International Auditing and Assurance Standards BoardIAS International Accounting StandardsIASB International Accounting Standards BoardIFRS International Financial Reporting StandardsIIC Institución de inversión colectiva (UCITS)IICIL Institución de inversión colectiva de inversión libre (hedge fund)IIMV Instituto Iberoamericano del Mercado De ValoresIOSCO International Organisation of Securities CommissionsISIN International Securities Identification NumberLATIBEX Market in Latin American securities, based in MadridMAB Mercado Alternativo Bursátil (alternative stock market)MEFF Mercado Español de Futuros y Opciones Financieros (Spanish financial

futures and options market)MFAO Mercado de Futuros del Aceite de Oliva y Opciones Financieros (olive oil

futures market)MIBEL Mercado Ibérico de Electricidad (Iberian electricity market)MiFID Markets in Financial Instruments DirectiveMMU CNMV Market Monitoring UnitMoU Memorandum of UnderstandingOECD Organisation for Economic Co-operation and DevelopmentOICVM Organismo de inversión colectiva en valores mobiliarios (UCITS)OMIP Operador do Mercado Ibérico de Energía (operator of the Iberian energy

derivatives market)P/E Price/earnings ratioRENADE Registro Nacional de los Derechos de Emisión de Gases de Efectos Inver-

nadero (Spain’s national register of greenhouse gas emission permits)ROE Return on EquitySCLV Servicio de Compensación y Liquidación de Valores (Spain’s securities

clearing and settlement system)SCR Sociedad de capital-riesgo (Venture capital company)SENAF Sistema Electrónico de Negociación de Activos Financieros (electronic

trading platform in Spanish government bonds)SEPBLAC Servicio Ejecutivo de la Comisión de Prevención del Blanqueo de Capi-

tales e infracciones monetarias (Bank of Spain unit to combat money laundering)

SGC Sociedad gestora de carteras (portfolio management company)SGECR Sociedad gestora de entidades de capital-riesgo (venture capital firm ma-

nagement company)SGFT Sociedad gestora de fondos de titulización (asset securitisation trust ma-

nagement company)SGIIC Sociedad gestora de instituciones de inversión colectiva (UCITS mana-

gement company)SIBE Sistema de Interconexión Bursátil Español (Spain’s electronic market in

securities)SICAV Sociedad de inversión de capital variable (open-end investment company)SII Sociedad de inversión inmobiliaria (real estate investment company)SIL Sociedad de inversión libre (hedge fund in the form of a company)SIM Sociedad de inversión mobiliaria (securities investment company)SME Small and medium-sized enterpriseSON Sistema organizado de negociación (multilateral trading facility)SV Sociedad de valores (broker-dealer)SVB Sociedad de valores y bolsa (broker-dealer and market member)TER Total expense ratioUCITS Undertaking for Collective Investment in Tradable Securities

I Securities markets and their agents: situation and outlook

11CNMV Bulletin. Quarter III/2011

Contents

1 Executive summary 13

2 Macro-financial setting 15

2.1 International economic and financial developments 15

2.2 National economic and financial developments 23

2.3 Outlook 32

3 Spanish markets 33

3.1 Equity markets 33

3.2 Fixed-income markets 41

4 Market agents 48

4.1 Investment vehicles 48

4.2 Investment firms 57

4.3 UCITS management companies 61

4.4 Other intermediaries: venture capital 63

List of exhibits

Exhibit 1: “Dark liquidity: the new IOSCO principles” 22

Exhibit 2: “The stockmarket flotation of Spanish savings banks” 27

Exhibit 3: “The temporary ban on short selling” 35

Exhibit 4: “Green Paper on the EU Corporate Governance Framework” 40

Exhibit 5: “Asset Securitisation Markets: Joint Forum Recommendations”

44

Exhibit 6: “Circular 3/2011 of 9 June modifying UCITS investment policies”

51

Exhibit 7: “ESMA technical advice to the European Commission on level 2 implementing measures for the Alternative Investment Fund Managers Directive”

54


1 Executive summary

• The pace of the world economy slowed appreciably in the year’s middle months in contrast to the 4.5% growth of the opening quarter, with some advanced economies among the weaker performers. Emerging market economies kept up a comfortable growth lead although they too experienced some loss of steam. Against this backdrop, evidence of the U.S.’s struggle to get its public finances under control, coupled with persistent concerns about Greece’s public debt, brought renewed turbulence to international financial markets which reached its height during the first half of August. The downside risks for world economic growth, which augur a renewed downturn in the coming quarters, have been increasing over the past two months.

• Financial market stress bore down heavily on equity prices, with European banks particularly affected, and was also responsible for an upswing in volatil-ity. Third-quarter losses on main stock markets ranged from 6.6% in the case of the Nasdaq to 25% in some European indices. In parallel, the rush into “safe- -haven” assets intensified, with U.S., UK and German debt among the benefi-ciaries, alongside assets denominated in Swiss francs and, also, non-financial assets such as gold. The sovereign credit spreads of a growing list of European countries were pushed to historic highs, and were only restored to stability by the ECB’s decision to buy European government bonds on secondary markets, and the adoption of new, national measures. At the closing date for this report,1 market volatility was still running high.

• The Spanish economy expanded 0.2% in the year’s second quarter, for a year- -on-year rate of 0.7% – in both cases two points below the result posted in the previous quarter. The slowdown in domestic activity was less marked than in other European countries, though year-on-year growth again trailed the aver-age for the euro area (1.6%). Unemployment rates stayed stuck above 20%, while Spanish inflation abated to 2.7% in August from the 3.5% peak of April, narrowing its differential versus the euro area to 0.2 percentage points. Figures for central government budgetary execution to the month of July square with the 2011 deficit reduction target, though the latest round of financial market turmoil unquestionably poses an upside risk for the public deficit and a down-side risk for economic activity.

• The business environment for Spanish financial institutions remains complex in the extreme, given the prevailing weakness of domestic activity and the disruption suffered by wholesale markets, which has caused funding condi-tions to deteriorate sharply.

1 20 September.

14 Securities markets and their agents: situation and outlook

• Non-financial listed companies increased their aggregate profits by 8% in the first-half period to 13.15 billion euros, while their aggregate debt dropped back 5.1%.

• Spanish stock markets’ first-quarter gains gave way to a price correction that gained in intensity from end-July onwards. The Ibex 35, up by 7.3% to March, shed 2% of its value in the second quarter and a further 19% approximately in the third, a performance more or less mirroring that of indices elsewhere in Europe. Market volatility peaked at times above 65%, recalling the levels reached in May 2010 during the first wave of the Greek debt crisis. Here, as in the rest of Europe, the banks were hardest hit, though the temporary ban on short selling of financial shares, ordered last August by the CNMV in concert with other European supervisors, went some way to smoothing out price vola-tility. In this context, stock market turnover has contracted by 2.7% year-to-date, putting liquidity conditions under a degree of strain.

• Domestic fixed-income markets also moved on the turbulences afflicting Euro-pean sovereign debt. These reached a new peak in early August, sending Span-ish government yields and spreads back to highs. Following this, the ECB’s secondary-market purchases of European bonds and the approval of other measures at national level restored a degree of calm that was to prove short- -lived. In September, evidence of the weakness of world economic activity set the markets on edge once more and prompted a fresh ascent in Spanish bond yields and spreads, which by the deadline for this report were testing 360 bp over the German bond. Meantime, the volume of fixed-income issues regis-tered with the CNMV shrank by 1.3% to 162 billion euros between January and September.

• Assets under management in investment funds dropped 2.5% in the first six months to just over 140 billion euros, as the redemption rush continued. Out-flows were strongest in fixed-income funds albeit on a rather smaller scale than in previous semesters. Investment fund returns held in positive territory though here too investment policies marked the difference. The aggregate profits of UCITS management companies fell by 3.8% between January and June in consonance with the downtrend in industry assets. Strong competition from bank deposits continues to dull the sector’s short-term recovery pros-pects and, furthermore, will likely persist in the foreseeable future.

• Investment firm business continued to labor under financial market turmoil throughout the first half of 2011, putting paid to hopes of a recovery in income flows from core industry services. The small advance in aggregate pre-tax prof-its (1.4% year-on-year) owed basically to extraordinary income coupled with operating cost containment. The number of loss-making firms rose slightly in the first-half period, though the volume of their losses tended to decrease. The sector’s solvency conditions remained in the comfort zone.

• The report includes seven monographic exhibits:

– The first runs through some of the issues raised by the recent trading boom in non-transparent securities market segments (dark liquidity) and the proposals made by IOSCO to mitigate its adverse impacts.


– The second describes the stockmarket flotation in July 2011 of Bankia and Banca Cívica as part of the restructuring of the Spanish financial system, setting out the criteria used by the CNMV in verifying both trans-actions.

– Exhibit three brings analytical considerations and empirical evidence to bear on the joint decision of 11 August by the securities market regula-tors of Spain, France, Italy and Belgium, under the coordinating aegis of ESMA, to impose a temporary ban on the creation or increase of short positions in certain financial shares.

– Exhibit four looks at the initiatives contained in the Green Paper on Cor-porate Governance published by the European Commission in April 2011, in order to improve the corporate governance of Europe’s companies, fo-cusing on those traded in regulated markets.

– The fifth exhibit reproduces the recently published recommendations of the Joint Forum to establish a regulatory framework that supports the re-establishment of a sustainable securitisation market.

– The sixth describes the main changes made by Circular 3/2011 modifying UCITS categories based on investment policy, in order to adapt the defi-nition of money-market fund to the harmonised definition issued by the Committee of European Securities Regulators (CESR), now ESMA, and introduce certain technical improvements.

– Finally, the seventh exhibit describes the main thrust of ESMA’s advice to the European Commission on the level 2 implementing measures of the Alternative Fund Managers Directive.

2 Macro-financial setting

2.1 International economic and financial developments

Since the latest edition of this report in the CNMV Quarterly Bulletin for the first quarter of 2011, the world macroeconomic and financial landscape has been per-turbed by a new wave of European sovereign debt market tensions, extending this time to a larger number of euro-area nations, and anxieties about certain aspects of the U.S.’s federal debt management. All this in a context of faltering economic activity.

So even though first-quarter figures showed world growth to be holding up well with rates close to 4.5%, the second quarter was characterised by a slowdown that was especially marked in the U.S. and some European economies, and will likely persist through the second half, according to the tenor of the latest indicators. The IMF is now projecting a 2011 advance of 4.0%, over one point less than in 2010, on account of the downturn in Japan (–0.5%), after the March earthquake, and the lesser growth momentum of emerging and certain advanced economies (see table 1).

The international macro-

-financial setting is gripped by

renewed turbulence.

World economic activity slows

sharply in the year’s middle

months...


Gross domestic product (annual % change) TABLE 1

IMF(*) OECD(*)

2007 2008 2009 2010 2011F 2012F 2011F 2012F

World 5.4 2.8 -0.7 5.1 4.0 (-0.3) 4.0 (-0.5) – –

United States 1.9 -0.3 -3.5 3.0 1.5 (-1.0) 1.8 (-0.9) 2.6 (+0.4) 3.1 (=)

Euro area 3.0 0.4 -4.3 1.8 1.6 (-0.4) 1.1 (-0.6) 2.0 (+0.3) 2.0 (=)

Germany 3.4 0.8 -5.1 3.6 2.7 (-0.5) 1.3 (-0.7) 3.4 (+0.9) 2.5 (+0.3)

France 2.2 -0.2 -2.6 1.4 1.7 (-0.4) 1.4 (-0.5) 2.2 (+0.6) 2.1 (+0.1)

Italy 1.5 -1.3 -5.2 1.3 0.6 (-0.4) 0.3 (-1.0) 1.1 (-0.2) 1.6 (=)

Spain 3.6 0.9 -3.7 -0.1 0.8 (=) 1.1 (-0.5) 0.9 (=) 1.6 (-0.2)

United Kingdom 2.7 -0.1 -4.9 1.4 1.1 (-0.4) 1.6 (-0.7) 1.4 (-0.3) 1.8 (-0.2)

Japan 2.4 -1.2 -6.3 4.0 -0.5 (+0.2) 2.3 (-0.6) -0.9 (-2.6) 2.2 (+0.9)

Emerging 8.9 6.0 2.8 7.3 6.4 (-0.2) 6.1 (-0.3) – –

Source: IMF and OECD.

(*) Figures in brackets show the change over the previous published forecasts. IMF, forecasts published in

September 2011 (versus June 2011). OECD, forecasts published May 2011 (versus November 2010).

The world’s main economies experienced a surge in inflation over the year’s opening months, which tended to remit in the middle months, in some European countries at least. Commodity prices began to head gradually lower in the spring after two years of vigorous growth, the exception being precious metals (see figure 1). Inflation-ary pressures were strongest in the emerging economies on their greater output buoyancy, and were contested in many cases by hikes in official interest rates. Among the advanced economies, the big news was the ECB’s decision to raise its benchmark rate by 25 bp on two occasions, to 1.25% in April and 1.5% in the month of July, after nearly two years without movement. Stateside, the Federal Reserve announced that it expected to keep rates at their current lows until 2013, in view of increasingly feeble domestic activity.

Against this renewed backdrop of global macro-financial instability, stock markets began sinking rapidly, volatility surged to end-August highs in excess of 40% and a broad group of European countries saw their sovereign spreads escalate once more. Further, the rush into “safe-haven” assets, both financial as in the case of U.S., Brit-ish and German bonds or instruments denominated in Swiss francs, or non-finan-cial, as in the case of gold, continued to intensify. Approval of a new public spend-ing ceiling in the United States, the adoption of additional consolidation measures in Europe’s most vulnerable economies and the government bond purchases ef-fected by the ECB from 8 August onwards, together with the joint decision by secu-rities market regulators in Spain, France, Italy and Belgium to impose a temporary ban on the short selling of domestic financial sector shares, initially helped to drive down aggregate volatility. But come September, the confirmation of slowing world growth and fears of a restructuring of Greece’s sovereign debt dealt a new blow to financial markets.

...while inflation has tended to

moderate, in Europe especially.

The upswing in uncertainty

spells a new blow for world bond

and equity markets...


Commodity prices FIGURE 1

50

150

250

350

450

jan-05 jan-06 jan-07 jan-08 jan-09 jan-10 jan-11

01/01/2005=100

Food Materials MetalsGold Precious metals Oil

Source: Thomson Datastream. Data to 20 September.

The tensions gripping stock and bond market were also quick to drag in interbank trading. As we can see from figure 2, the three-month euro Libor-OIS spread wid-ened significantly as of July from just under 25 basis points to mid-September highs testing 80 basis points, the highest level since spring 2009.

Three-month Libor-OIS (basis points) FIGURE 2

0

25

50

75

100

125

150

175

jan-

09

mar

-09

may

-09

jul-0

9

sep-

09

nov-

09

jan-

10

mar

-10

may

-10

jul-1

0

sep-

10

nov-

10

jan-

11

mar

-11

may

-11

jul-1

1

sep-

11Euro area United States

Japan United Kingdom

Source: Bloomberg. Data to 20 September.

Government bonds yields displayed similar behaviour to during the last bouts of volatility in certain euro-area sovereign debt markets; namely a significant run-down in the yields of U.S., German and UK treasuries on their reputation as safe- -haven assets to historical lows of below 2% for the ten-year maturity. In contrast, the European economies in receipt of multilateral financial assistance saw their in-terest rates soar to peak levels of 24% for Greece and 14% in the cases of Ireland and Portugal. Meantime, interest rates on Spanish and Italian government paper pulled into line over the year’s middle months with yields in both cases touching highs of over 6% (see figure 3). As figure 4 shows, these rising tensions progressively drew in other European economies like Belgium and France, which had not previously suffered major fluctuations in their sovereign risk indicators.

...and also European interbank

markets.

As in earlier rounds of market

turmoil, investors have rushed in

growing number into perceived

safer assets...


Ten-year government bond yields (%) FIGURE 3

0

4

8

12

16

20

24

jan-10 apr-10 jul-10 oct-10 jan-11 apr-11 jul-11

Germany United Kingdom USA Spain Greece Portugal Ireland ItalyFrance Belgium


Sovereign credit spreads, 5-year CDS (basis points) FIGURE 4

Countries granted financial assistance Other countries

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000


Greece

Portugal

Ireland

050

100150200250300350400450500550


Spain GermanyItaly United KingdomUSA FranceBelgium


Available indicators for the extent of sovereign risk contagion from more vulnerable economies to the rest of Europe, and the financial sector, show that the effect has been considerable. More specifically, indicators for sovereign credit risk contagion from Greece to other European economies have been running at highs since the start of August, peaking at just above the crisis levels of May 2010 (see figure 5). Further, dynamic estimates of credit risk transmission between Europe’s financial and public sectors reveal that the public sector has been a contagion source of the first magnitude since early 2010, to increasingly damaging effect since the second quarter of this year (see figure 6).

...and rising sovereign spreads

across a wide range of Europe’s

economies, victims of contagion.


Contagion of the Greek crisis to other European economies1 FIGURE 5

0102030405060708090

100

jan-

08

apr-

08

jul-0

8

oct-

08

jan-

09

apr-

09

jul-0

9

oct-

09

jan-

10

apr-

10

jul-1

0

oct-

10

jan-

11

apr-

11

jul-1

1 0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Greece to IrelandGreece to PortugalGreece to SpainGreece to Italy

Greece to GermanyGreece to FranceGreek sovereign CDS (right-hand scale)

basis points%

Source: CNMV.

1 The figure shows the percentage of variance in the CDS premiums of various European countries that is

not ascribable to historical information but to contemporaneous shocks in Greece’s credit risk. The

resulting contagion indicator is increasing with the intensity of the effect produced by specific shocks in

Greek sovereign spreads. The scale of contagion on a given day is calculated from available data for the

100 days preceding the current date, with the series also filtered by 30-day moving averages. Data to 20

September.

Sovereign-financial contagion in Europe1 FIGURE 6

-100

-75

-50

-25

0

25

50

75

100

jul-08

oct-08

jan-09

apr-09

jul-09

oct-09

jan-10

apr-10

jul-10

oct-10

jan-11

apr-11

jul-11

0

500

1,000

1,500

2,000

2,500

3,000basis points

Sovereign-financial contagion indicator

Average Greek, Irish and Portuguese sovereign CDS (right-hand scale) %

1 The figure shows the percentage of variance in the average CDS of the European banks sector and Greek,

Portuguese and Irish sovereign bond that is not ascribable to their historical information but to

contemporaneous return shocks. The resulting contagion indicator is decreasing with the increase in

relative intensity of the impact of specific sovereign risk shocks on financial sector CDS. Positive values

denote a net contagion effect from the European banking sector to the three countries’ sovereign sector,

while with negative values the source of the contagion is the sovereign risk of the study nations. Contagion

on a given day is calculated from available data for the 60 days preceding the current date, with the series

also filtered by 30-day moving averages. Data to 20 September.

Public debt market tensions also took their toll on the risk premiums of U.S. and European corporate issuers and, by extension, on their volumes of issuance. As fig-ure 7 shows, the spreads of medium-to-low rated corporate issuers widened signifi-cantly in both the U.S. and euro area to not far short of the levels recorded in May 2010. Specifically, high-yield borrowers saw their spreads rise by around 315 and

Tensions in private fixed-income

markets drive up the premiums

of worse-rated issuers...


350 basis points in the United States and euro area respectively, from the lows of spring 2011 to the neighbourhood of 7%. Meantime, the spreads of medium-grade issuers (rated BBB or equivalent) climbed 125 bp in the U.S. and 165 bp in the euro area as far as 2.4% and 3.0% respectively.

But the single most visible effect of the tensions gnawing at the private corporate sector must be the relentlessly declining issue volumes on primary debt markets. As we can see from figure 8, net international debt issuance continued to shrink in the year’s middle months due to lower government borrowing, the virtual drying-up of financial sector issuance, primarily in Europe, and the lull in borrowing by non-fi-nancial corporations. The tougher funding conditions faced by European financial institutions are not the only factor bearing down on issue volumes. Other regular funding sources, such as U.S. money-market funds, also thinned considerably in the summer period. In this respect, the recent coordinated decision by a number of banks, including the ECB, to provide liquidity in dollars to the commercial banking sector could help them steer clear of a funding crunch.

Corporate bond risk premiums1 (percentage points) FIGURE 7

United States Euro area

0.0

2.5

5.0

7.5

10.0

12.5

15.0

17.5

20.0

22.5

jan-07

jul-07

jan-08

jul-08

jan-09

jul-09

jan-10

jul-10

jan-11

jul-11

High-yield BBBAAAHigh-yield BBBAAA

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

15.0

17.5

20.0

22.5

25.0

jan-07

jul-07

jan-08

jul-08

jan-09

jul-09

jan-10

jul-10

jan-11

jul-11

Source: Thomson Datastream (Merrill Lynch, IBOXX indices). Data to 20 September.

Expressed as the yield spread between bonds of the same maturity and credit quality belonging to a given

index and 10-year government bonds (a synthetic bond in the case of the euro area).

Meantime, the stock indices of leading advanced economies, which had generally held up well over the second quarter of 2011, plunged into losses in the third – by over 20% in the case of European indices and from 6.6% to 11% in the U.S. and Japan. Accompanying the fall was an upswing in volatility (as far as 40% in terms of historic volatility and, in some indices, to over 50% by the implied volatility measure). In most cases, however, the increase stopped short of the levels reached in May 2010, when the Greek crisis first erupted, or at end-2008 following the Leh-man Brothers collapse. Falling share prices reduced the P/E (price-earnings) ratios of main world indices to around or below 10 times, compared to historical averages of 14 to 16 depending on the index.

...and cause an issuance slump

that has proved especially

intense in Europe.

Key stock indices of advanced

economies recede sharply in

the third quarter, especially in

Europe...


Net international debt issuance, billion dollars FIGURE 8

By type of issuer

-200

0

200

400

600

800

jan-07 may-07 sep-07 jan-08 may-08 sep-08 jan-09 may-09 sep-09 jan-10 may-10 sep-10 jan-11 may-11 sep-11

Guaranteed financial private sector Non-guaranteed financial private sector

Non-financial private sectorPublic sector

Source: Dealogic. Monthly data. Data for September 2011 (to the 20th) are restated on a monthly basis.

Performance of main stock indices1 (%) TABLE 2

3Q11(to 20 September)

2007 2008 2009 2010 3Q10 4Q10 1Q11 2Q11%

prior qt.%

Dec%

y/y2

World

MSCI World 7.1 -42.1 27.0 9.6 13.2 8.6 4.3 -0.3 -12.7 -9.2 -0.8

Euro area

Euro Stoxx 50 6.8 -44.4 21.1 -5.8 6.8 1.6 4.2 -2.1 -24.9 -23.4 -23.6

Euronext 100 3.4 -45.2 25.5 1.0 7.5 2.8 3.2 -1.2 -19.9 -18.3 -17.2

Dax 30 22.3 -40.4 23.8 16.1 4.4 11.0 1.8 4.8 -24.5 -19.4 -11.5

Cac 40 1.3 -42.7 22.3 -3.3 7.9 2.4 4.8 -0.2 -25.1 -21.6 -21.2

Mib 30 -8.0 -48.7 20.7 -8.7 6.2 1.1 6.4 -7.1 -25.5 -26.4 -25.7

Ibex 35 7.3 -39.4 29.8 -17.4 13.5 -6.2 7.3 -2.0 -19.3 -15.2 -22.2

United Kingdom

FTSE 100 3.8 -31.3 22.1 9.0 12.8 6.3 0.1 0.6 -9.8 -9.1 -4.3

United States

Dow Jones 6.4 -33.8 18.8 11.0 10.4 7.3 6.4 0.8 -8.1 -1.5 6.1

S&P 500 3.5 -38.5 23.5 12.8 10.7 10.2 5.4 -0.4 -9.0 -4.4 5.2

Nasdaq-Cpte 9.8 -40.5 43.9 16.9 12.3 12.0 4.8 -0.3 -6.6 -2.4 10.0

Japan

Nikkei 225 -11.1 -42.1 19.0 -3.0 -0.1 9.2 -4.6 0.6 -11.2 -14.7 -9.4

Topix -12.2 -41.8 5.6 -1.0 -1.4 8.4 -3.3 -2.3 -11.1 -16.0 -11.4

Source: Datastream.

1 In local currency.

2 Year-on-year change to the reference date.


European and Japanese stock indices have been the worst performers year-to-date (from -9.1% in the case of the FTSE 100 to -26.4% in the case of the Mib 30), while U.S. indices managed to contain their losses between the -1.5% of the Dow Jones and -4.4% of the S&P 500. Emerging market indices, with few exceptions, posted falls on a similar scale. By sector, financial shares took the biggest punishment, es-pecially in Eu rope, where doubts persist about the strength of the banking sector and the extent of its exposure to European sovereign debt.

In currency markets, salient developments have been the euro’s slide against the dollar, starting last May, which has taken exchange rates down from 1.49 to 1.37 dollars, and, above all, the appreciation of the yen and Swiss franc against the euro and the dollar, in tune with the safe-haven role they have exercised throughout the crisis.

...with the bear trend extending

to the stock indices of emerging

market economies.

The euro loses ground against

other leading currencies.

Exhibit 1: “Dark liquidity: the new IOSCO principles”

For some years now, a growing part of securities market trading has taken place in dark venues or else has been instrumented through orders that are not subject to pre-trade transparency requirements. In both these cases, buy and sell orders are not disclosed to all market participants, while the liquidity they generate is not factored with remaining orders into the price formation process. This kind of trading is conducted on electronic platforms managed by multilateral trading fa-cilities, broker-dealers and even regulated markets in specific trading segments. According to data from the European Securities and Markets Authority (ESMA), as many as 10% of the transactions closed on European regulated markets and multilateral facilities in 2010 did not meet conditions of pre-trade transparency.

In May 2011, IOSCO’s Technical Committee approved a report1 expressing regu-lators’ concerns about the rapid development of these so-called dark pools. Spe-cifically, IOSCO identifies three ways or areas in which trades not subject to pre-transparency requirements may impair market operation:

– Price formation, since dark liquidity does not contribute to price discovery.

– Potential fragmentation of liquidity and information, so buyers have to search for liquidity across a greater number of venues, pushing up their transaction costs.

– Fair access and market integrity, such that certain participants may be de-nied access to the market or order information selectively channelled to-wards some users at the expense of others.

IOSCO has accordingly developed a series of principles to mitigate the adverse effects of dark pool trading in these three domains. And its Technical Committee urges members to bear them in mind when preparing regulatory initiatives that address dark pools and dark orders:

– The first principle refers to the need to ensure timely access to information on the price and size of securities orders (pre-transparency) to mitigate the


2.2 National economic and financial developments

Quarterly National Accounts data for the second quarter of 2011 show that Spain’s GDP grew 0.2% in quarterly and 0.7% in year-on-year terms, in both cases two deci-mal points below previous quarter’s rate. Note that deceleration was rather less than in other European countries, though the economy’s year-on-year advance still trailed behind the average for the euro area (1.6%).

Year-on-year growth of Spain’s GPD drew heavily on external demand, which dou-bled its contribution to aggregate growth as far as 2.6 points. Conversely, domestic demand detracted 1.9 points against the 1.5 points of one year before, with private consumption (-0.2% year-on-year), government consumption (-1%) and, particular-ly, gross fixed capital formation (-6%) also contributing on the downside. Meantime, imports dropped by 1.7% year-on-year after a steady advance spanning five con-secutive quarters, while exports rose by 8.4% (12.1% in the first quarter).

Spanish GDP advances at a

modest rate...

...thanks to the strength of

exports...

potentially adverse effects of liquidity being fragmented across a multiplic-ity of trading venues, and to facilitate best execution and efficient price formation. The Technical Committee acknowledges the heterogeneous na-ture of trading platforms and orders themselves and that it may be appropri-ate to apply different levels of pre-trade transparency. Indeed it recognises that full disclosure requirements may need to be waived in the case of large orders with a potential impact on price formation.

– The second principle, turning on the dissemination of price and volume information on already executed trades (post-transparency), insists that all transactions should be disclosed on the same basis to all participants, in-cluding those executed in dark pools. Regarding the content of disclosure, the Technical Committee leaves it to regulators’ discretion whether to spe-cifically identify dark venues or the fact that a trade has resulted from a dark order.

– The third principle proposes that transparent orders should take priority over dark orders in the execution queue.

– The fourth principle stresses that regulators must be able to access informa-tion on orders and transactions effected in dark pools.

– The fifth principle insists that dark pools should provide market partici-pants with sufficient information about the way orders are handled and executed.

– Finally, the sixth principle calls on regulators to periodically monitor devel-opments in dark pools and dark orders to ensure that they are not impairing the efficiency of the price formation process, and, where necessary, to take appropriate preventive action.

1 Principles for Dark Liquidity. Final Report. May 2011, available at http://www.iosco.org/library/pubdocs/

pdf/IOSCOPD353.pdf

http://www.iosco.org/library/pubdocs/pdf/IOSCOPD353.pdf



On the supply side, deceleration extended to all branches of production except con-struction which, despite clawing back some ground, still registered the steepest de-cline (-4.1%) in year-on-year terms. The energy sector, meantime, slowed to 0.9% (3.4% in the first quarter) and industry to 3.2% (4.1% in the first quarter), while the services sector dropped one decimal point of growth as far as a year-on-year rate of 1.2%.

Spain: main macroeconomic variables (annual % change) TABLE 3

European Commission*

2007 2008 2009 2010 2011F 2012F

GDP 3.6 0.9 -3.7 -0.1 0.8 (+0.1) 1.5 (-0.2)

Private consumption 3.7 -0.6 -4.2 1.2 0.8 (-0.1) 1.1 (-0.5)

Government consumption 5.5 5.8 3.2 -0.7 -1.4 (-0.1) -0.3 (=)

Gross fixed capital formation, of which: 4.5 -4.8 -16.0 -7.6 -3.4 (-0.3) 1.8 (-0.9)

Equipment 10.4 -2.5 -24.8 1.8 3.1 (-0.6) 4.4 (-1.6)

Exports 6.7 -1.1 -11.6 10.3 7.0 (+1.5) 5.8 (+0.2)

Imports 8.0 -5.3 -17.8 5.4 1.7 (+0.3) 3.8 (-0.7)

Net exports (growth contribution, pp) -0.8 1.5 2.7 1.0 1.4 (+0.3) 0.5 (+0.2)

Employment 2.8 -0.5 -6.6 -2.4 -0.6 (-0.3) 0.9 (-0.2)

Unemployment rate1 8.3 11.3 18.0 20.1 20.6 (+0.4) 20.2 (+1.0)

HICP 2.8 4.1 -0.2 2.0 3.0 (+1.5) 1.4 (=)

Current account (% GDP) -10.0 -9.6 -5.5 -4.5 -4.1 (-0.3) -4.1 (-0.5)

General government (% GDP) 1.9 -4.2 -11.1 -9.2 -6.3 (+0.1) -5.3 (+0.2)

Source: Ministry of Economy and Finance, National Statistics Office (INE) and European Commission.

1 Eurostat definition.

* Forecasts published in spring 2011 (with respect to autumn 2010). In September 2011, the European

Commission released interim European economic forecasts ahead of the autumn edition, which

maintained its growth projection for the Spanish economy at 0.8% for 2011, and downward revised its

inflation forecast by one decimal point to 2.9%.

Inflation in the EU, measured by the harmonised index of consumer prices, eased to 2.7% in August after the peak levels of April 2011 (3.5%), with the fall extending to most components. Spain’s headline inflation moderated rather more steeply, nar-rowing the differential with the euro area to 0.2 points. Core inflation, meantime, dropped to 1.6% from the 2.1% high of April-May to stand four decimal points above the euro-area average.

Spanish labour market statistics offered little to celebrate, with around 1% fewer employed workers at the close of the second quarter (18.3 million) and unemploy-ment rates stuck above 20%. Unit labour costs have receded by an average 2% since 2010 in contrast to the pre-crisis years, when they were advancing ahead of 4% an-nually driven by rising wage compensation per worker. The subsequent decline was the combined work of flat wage growth and higher labour productivity.

The latest data for central government budgetary execution reveal a 22.75 billion deficit on a national accounts basis over the first seven months of 2011 (2.1% of GDP), an 11.8% decrease with respect to the year-ago period. Non-financial revenues

...and positive input from

industry and, to a lesser extent,

services.

Spanish inflation has abated

since April, narrowing the gap

versus the euro area...

...in a framework of labour

market weakness...

...and intense budgetary

adjustment spearheaded by

central government.


grew by 1% while non-financial payments fell by 22.7% in year-on-year terms in tune with budgetary austerity. Meantime, the budgetary outcomes of the autono-mous communities throw up a first-half deficit equivalent to 1.2% of national GDP (1% of GDP in the same period of 2010) on the back of a decline in non-financial revenues (-3.6%) and slightly higher spending (0.5%). The general government debt ratio moved up 4.8 points in the opening quarter to 65.2% of GDP. Of this volume, 49.4 points corresponded to central government, 12.4 to the autonomous communi-ties and 3.5 to local authorities.

One move that may help alleviate the uncertainty surrounding the sustainability of Spain’s public finances is Parliament’s approval of a bill to limit the structural budg-et deficit by amending Article 135 of the Constitution. Under the recast provision, the structural deficit (discounting public revenues and expenditures derived from the normal fluctuations of the business cycle) may not exceed 0.40% of GDP across all sub-sectors of general government.2

As well as conducting their business in the face of persistently weak domestic activ-ity, Spanish credit institutions had to cope with both the challenges of sector re-structuring and a resurgence in market tensions that has placed added pressure on their share prices and funding conditions.

The income sheets of national deposit-taking entities held in positive territory over the first six months of 2011, with aggregate net profits topping 4.70 billion euros, 23% less than in the first half of 2010. Behind these lower numbers was a fall in net interest income (down 21%), originating in higher interest costs (up 30%), which could not be sufficiently offset by substantial improvement in the sector’s impair-ment losses in financial assets.

Outstanding loans to the non-financial private sector (corporations and households) registered a year-on-year decline of 3% to the month of July, prolonging the down-ward trend that commenced in 2009. All lending modalities shared in the decrease led by household consumer credit (-5%) and business loans (-4.2%). Home purchase lending has contracted by around 1% since June after the small advance of full-year 2010, the likeliest cause being the increased tax pressure on home ownership.3 The contrast is provided by lending to public authorities, which expanded 15% in year-on-year terms. In the euro area, aggregate lending to the non-financial private sector rose at a year-on-year rate ahead of 2%. The advance extended to all modalities with home purchase loans strongly to the fore (5%). Finally, growth of household con-sumer credit cooled to 0.6%, while business lending kept up a steady but discreet recovery (1.4%).

By July, the non-performing loans ratio of Spanish credit institutions was up to 6.9%, two decimal points higher than in June and almost one and a half points

2 This ceiling will be regulated by a future law to be approved before 30 June 2012 and implemented as of

2020. The limit will be set at 0.4% of GDP on a general government basis, 0.26% for central government

and 0.14% for the autonomous communities, but may be subject to review in 2015 and 2018. Local au-

thorities will be required to present a balanced budget.

3 Tax deductions for first home purchases will be discontinued in 2011. Also, the VAT on new housing

purchases was raised from 7% to 8% in July 2010.

The newly approved public

deficit ceiling may help to dispel

market uncertainty.

Credit institutions have to

negotiate a complex landscape,

characterised by...

...weak domestic activity...

...an ongoing contraction in

lending to the non-financial

private sector...

...an NPL ratio fast approaching

7% on the deterioration of loans

to construction and real estate...


above its year-ago levels. The biggest culprits were again construction and real es-tate development, with a combined second-quarter ratio of 17% (13.5% in Decem-ber 2010 and 10.9% in June 2010), while delinquent loans to households held at 3.2%, two decimal points less than at mid-year 2010.

Spanish banks have faced increasing funding difficulties, with the summer months proving especially tough as market tensions flared once more. Since the start of the crisis, institutions have had to find alternative sources to the international whole-sale markets they could comfortably draw on around the middle of the last decade. Hence their recourse to non-conventional means like government-backed bonds, whose issuance has nonetheless tapered off this year,4 or borrowing from the Eu-rosystem. Funds raised through this last channel peaked at over 130 billion euros in the middle months of 2010, then dropped back to around 40 billion in the first quar-ter of 2011 until renewed debt market tensions sent them heading back upwards to 70 billion euros in August last.

The trends emerging over recent months in Spanish credit institution financing strategies combine: (i) a major drive to broaden their customer base and build their deposit volumes (deposits from the non-financial private sector have climbed by over 16 billion euros since the lows of April 2010); (ii) a gathering shift in the debt financing mix towards mortgage covered bonds; and (iii) a step-up in equity issu-ance. The above change in the debt mix mirrors developments elsewhere in Europe (see figure 9), where the across-the-board surge in investor risk aversion has per-suaded banks to opt increasingly for products of perceived higher quality, like mort-gage covered bonds (46% of Spanish entities’ issue volume in the year and 38% that of their European peers). Finally, the recent upswing in the equity issuance of Span-ish credit institutions traced mainly to the stockmarket listings of two entities aris-ing from savings bank mergers (see exhibit 2 of this report).

Gross medium- and long-term debt issuance by financial entities FIGURE 9

Europe SpainOtherIG bondsHY bonds

ABSCovered bonds% covered bonds/total issues (right-hand scale)

0

90

180

270

360

450

2006 1Q 2007 1Q 2008 1Q 2009 1Q 2010 1Q 2011 1Q10

20

30

40

50

60Billion euros %

0

10

20

30

40

50

60

70

80

2006 1Q 2007 1Q 2008 1Q 2009 1Q 2010 1Q 2011 1Q0

10

20

30

40

50

60

70

80Billion euros %

Source: Dealogic. Data to 20 September 2011.

4 Issuance of government-backed bonds has faded to just four billion euros year-to-date compared to the

13 and 48 billion euros of 2009 and 2010 respectively.

...and tougher funding

conditions amid renewed market

stress.

Entities respond by competing

for deposits and centring their

debt issuance in high-quality

instruments.


Equity issuance by financial entities FIGURE 10

Europe SpainCapital increasesIPOs

Capital increasesIPOs

0.0

0.2

0.4

0.6

0.8

1.0

1.2

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

% GDP

0.0

0.2

0.4

0.6

0.8

1.0

1.2

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

% GDP

Source: Dealogic. Data to 20 September 2011. Data for this last year restated on an annual basis.

Exhibit 2: “The stockmarket flotation of Spanish savings banks”

Royal Decree-Law 2/2011 of 18 February on the strengthening of the Spanish fi-nancial system, toughened the capital requirements of Spanish credit institutions by establishing a minimum core capital ratio of 8% of risk-weighted assets, rising to 10% for those institutions with less than 20% of their equity in the hands of private investors and, additionally, reliant on wholesale funding for over 20% of their net loans. In order to meet the condition of having a minimum percentage of equity under private investor ownership, some savings banks have opted to transfer their financial activities to a newly created commercial bank and apply for its shares to be admitted to stockmarket trading. By the deadline for this re-port, the first entities arising from this strategy, Bankia and Banca Cívica, had had their listing applications approved by the CNMV, on 20 and 21 July respectively.

The criteria utilised by the supervisor in verifying these operations are summa-rised below:

1. Ownership dispersion

Among the listing conditions stated in Royal Decree 1310/2005 is that shares ad-mitted to trading should have a wide enough distribution to ensure them suffi-cient secondary market liquidity. This requirement is normally met through a public offer for sale or subscription before the entity begins trading. The RD estab-lishes that ownership dispersion will be sufficiently wide if 25% of the shares for which admission is sought are distributed among the public. However this thresh-old can be lowered if the market can operate effectively due to the large number of the issuer’s shares outstanding and the extent of their distribution. At times, the CNMV has accepted an ownership dispersion below 25% (though never as low as 20%) for large-scale transactions involving a large number of shareholders, but always providing the issuer makes certain undertakings in return. In the case of


the stockmarket listings of Bankia and Banca Cívica, the regulator’s view was that share distribution was sufficient, considering that Bankia and Banca Cívica had a free-float1 on their admission dates of 43.3% and 44.7% respectively.

2. The listing price

As on any occasion when the public are asked to invest their savings in particu-larly complex market conditions, the CNMV was doubly vigilant with regard to the pricing procedures followed by issuers and their advisors. Normally, the most effective guarantee of fair, independent price formation is the existence of a large tranche of qualified investors participating in the bookbuilding2 process. In this case, it was stipulated that the qualified investor tranche should equate to 40% of the offer volume before the exercise of the purchase or greenshoe option tradi-tionally reserved for placing agents.

In savings bank placements, the CNMV has established that at least half of the qualified investors’ tranche should be formed by the sub-category of institutional investors, that is, the investors envisaged in letters a), b), c) and d) of Article 78(2) of the Securities Markets Law, defining the different types of qualified investor.

Finally, the supervisor considered that to guarantee a diverse enough base of in-vestor institutions contributing to efficient price formation, at least one hundred qualified investors should acquire a significant stake through the bidding process.

The following two tables show the breakdown of placements across subscriber categories.3

Results of BANKIA IPO

Types of subscribers No. of shares % offering No. of subscribers

Financial institutions 105,055,568 12,74 532

- Spanish market 80,208,378 9,73 511

- Foreign market 24,847,190 3,01 21

Insurance corporations 86,433,137 10,48 145

Public authorities 2,597 0,00 2

SUB TOTAL 191,491,302 23,22 679

Others (*) 633,080,951 76,78 270,484

TOTAL OFFERING 824,572,253 100 271,163

Pro memoria:

Price per share (euros) 3,75

Capital raised (million euros) 3,092

(*) Non-financial corporations, households and private not-for-profit organisations.


Non-financial listed companies reported aggregate net profits of 13.15 billion euros in the first half of 2011, 8% more than in the same period last year (see table 4). Prof-its growth extended to all sectors with the exception of energy, whose combined earnings dropped 10% approximately to 6.13 billion euros. The top performers were retail and services and industrial sector companies, with profits growth of over 10% to 5.24 billion and 818 million euros respectively. But perhaps the most newsworthy development was the return to profit of construction and real estate firms, who post-ed first-half earnings of 954 million euros after several years of heavy losses.

Earnings by sector:1 non-financial listed companies TABLE 4

EBITDA2 EBIT3 Net profit

Million euros 1H10 1H11 1H10 1H11 1H10 1H11

Energy 16,044 15,545 10,767 10,265 6,796 6,129

Industry 2,161 2,217 1,328 1,394 741 818

Retail and services 14,583 15,777 8,333 8,917 4,660 5,240

Construction and real estate 3,616 4,340 2,004 2,722 -3 954

Adjustments -102 -85 -28 -18 1 14

AGGREGATE TOTAL 36,302 37,794 22,404 23,280 12,195 13,155

Source: CNMV.

1 Year-to-date.

2 Earnings before interest, taxes, depreciation and amortisation.

3 Earnings before interest and taxes.

Breaking down listed companies in terms of their net profit for the year (see figure 11, left panel), we find a broadly similar pattern to the two preceding first-half peri-ods. A majority of firms posted earnings of less than 100 million euros, though the number with profits between 200 and 300 million was higher than in the year-ago

Non-financial listed companies

grow their profits 8% in first half

2011...

...with little variation in the

results of individual firms.

Results of BANCA CÍVICA IPO

Types of subscribers No. of shares % offering No. of subscribers

Financial institutions 46,371,203 20,87 89

- Spanish market 18,324,440 8,25 83

- Foreign market 28,046,763 12,63 6

Insurance corporations 12,304,399 5,54 30

Public authorities 13,330 0,01 5

SUB TOTAL 58,688,932 26,42 124

Others (*) 163,453,868 73,58 66,530

TOTAL OFFER 222,142,800 100 66,654

Pro memoria:

Price per share (euros) 2,7

Capital raised (million euros) 600

(*) Non-financial corporations, households and private not-for-profit organisations.

1 Percentage of the issuer’s share capital that is available for purchase on the market.

2 Bookbuilding is a price formation mechanism based on a demand prospection among potential

investors assessing the quantities and price at which they would be willing to transact. Depending on

the results, the placing agent and issuers arrive at a fixed price or discount rate for the placement.

3 For a correct reading of these data, please bear in mind that a portion of institutional investment

(corresponding to non-financial large corporations) appears under “Others”.


period. As occurred last year, no single firm suffered losses deeper than 400 million euros. Finally, among the listed companies in profit over first-half 2010 and 2011 (see figure 11, right panel), a larger number had reported moderate improvement or deterioration (an increase or decrease of less than 40%), while those with more pro-nounced swings in either direction were fewer overall.

Non-financial listed companies by: FIGURE 11

Net profit Change in net profit1

Net profit intervals (million euros)

June 2011 June 2010

Net profit intervals (% annual change)

< -5

00-5

00 &

-400

-400

& -3

00-3

00 &

-200

-200

& -1

00-1

00 &

00

& 10

010

0 &

200

200

& 30

030

0 &

400

400

& 50

050

0 &

600

600

& 70

070

0 &

800

800

& 90

0 9

00 &

100

0>

1000

0

10

20

30

40

50

60

70

80

90

Num

ber o

f com

pani

es

<-1

00

<-1

00 &

<-8

0

<-8

0 &

<-6

0<

-60

& <

-40

<-4

0 &

<-2

0

<-2

0 &

<0

<0

& <

20

<20

& <

40<

40 &

<60

<60

& <

80

<80

& <

100

<10

0 &

<12

0

<12

0 &

<14

0<

140

& <

160

<16

0 &

<18

0

>18

00

5

10

15

20

25

Num

ber o

f com

pani

es

June 2011 June 2010

Source: CNMV.

1 Number of entities distributed according to the change in their net profit, including only those with a

positive net outcome in both years.

The combined debt of non-financial listed companies dropped by 5.1% to 310 bil-lion euros between December 2010 and June 2011, in a break with the rising trend of previous years (see table 5). The contraction, however, was far from universal, with debt actually increasing in two (the industrial sector and construction and real estate) and falling in two others (energy and retail and services). More specifically, industrial firms grew their debt balance 19.2% to almost 18 billion euros, the cause being one firm’s financing of its acquisition of a foreign competitor, while the total debt of construction and real estate operators rose by a more subdued 1.7% to 101 billion euros. Meantime, firms in the energy sector and retail and services cut their debt levels by 7.6% and 12.0% respectively. Note that the sectors reporting higher debt in the first half of 2011 were also those that had increased debt less or even decreased it in the course of the preceding years.

Despite this aggregate reduction in indebtedness, financial leverage (the ratio between debt and net equity) ticked up from 1.4 at end-2010 to 1.5 in June 2011 due to a reduc-tion on the equity side (see table 5). Meantime, the debt coverage ratio, measuring the years needed to repay existing debt assuming constant EBITDA, rose from 3.8 in De-cember 2010 to 4.0 in June 2011. The biggest jump here (from 2.1 to 4) corresponded to industry, the source being the same large corporation remarked on above. Retail and services was the only sector that reduced its debt coverage ratio thanks to a strong earnings performance coupled with a decrease in aggregate indebtedness. Companies’ interest coverage ratios deteriorated slightly, with EBIT/interest expenses down from 3.1 at end-2010 to 2.6 in June 2011, though not all sectors participated in the decline.

Non-financial listed companies

pay down debt by 5.1% in the

first half of 2011...

...though not all sectors share in

the decrease.


Gross debt by sector: listed companies TABLE 5

Million euros 2007 2008 2009 2010 1H11

Energy

Debt 69,172 82,608 100,572 98,283 90,815

Debt/ Equity 0.8 0.9 1.1 0.9 0.9

Debt/ EBITDA1 2.5 2.8 3.5 2.8 2.9

EBIT2/ Interest expenses 4.1 3.7 3.4 4.2 3.8

Industry

Debt 13,312 15,645 15,953 14,948 17,824

Debt/ Equity 0.6 0.7 0.7 0.6 0.9

Debt/ EBITDA 1.8 2.7 3.0 2.1 4.0

EBIT/ Interest expenses 5.9 3.4 3.1 5.0 2.8

Construction and real

estate

Debt 138,933 119,788 104,762 99,917 101,605

Debt/ Equity 3.1 3.8 4.1 3.4 3.1

Debt/ EBITDA 10.8 31.9 22.5 11.2 11.7


Retail and services

Debt 96,941 112,322 108,579 115,413 101,605

Debt/ Equity 1.7 2.1 1.8 1.6 1.9

Debt/ EBITDA 3.0 3.6 3.7 3.4 3.2


Adjustments3 Debt -17,391.0 -20,802.0 -1,908 -1,792 -1,670

AGGREGATE TOTAL4 Debt 300,967 309,561 327,958 326,769 310,179

Debt/ Equity 1.5 1.6 1.6 1.4 1.5

Debt/ EBITDA 4.0 4.6 4.8 3.8 4.0


Source: CNMV.

1 Earnings before interest, taxes, depreciation and amortisation.

2 Earnings before interest and taxes.

3 In drawing up this table, we eliminated the debt of issuers consolidating accounts with some other

Spanish listed group. The figures in the adjustments row correspond to eliminations from subsidiary

companies with their parent in another sector.

4 This table did not previously include any financial entities, comprising credit institutions, insurance

companies and portfolio companies. However, as IPP (Periodic Public Information) forms are the same for

portfolio companies as for non-financial companies starting in 2008, it has been decided to include them in

the aggregate figure. Data for the 2007 close have been restated to factor the impact of Criteria Caixacorp.

Household asset indicators for the first quarter of 2011 reveal a further decline in savings rates to just over 12% of disposable income, remote from the highs record-ed at the start of 2010 (18.1%). In the same period, household debt dropped below 125% of gross disposable income on a combination of stable income and lower lia-bilities, while net wealth contracted slightly as depreciating real estate cancelled out the small advance in financial asset prices.

As to investment decisions, households’ net financial asset purchases in the year’s opening quarter came to 3.5% of GDP5 (4.4% in 2010). The acquisitions mix evi-denced Spaniards’ continuing preference for lower-risk instruments, with invest-

5 Cumulative four-quarter data.

Household savings shrink, along

with indebtedness.

Homes continue gearing

their investment to lower-risk

instruments.


ment in term deposits and insurance and pension plan products at 3.1% and 0.8% respectively of first-quarter GDP. The contrast was provided by the slump in equity investment (0.1% of GDP) versus the two previous years, and net outflows from investment funds approaching 1.5% of GDP (1.7% in 2010). Finally, the share of household liabilities receded five decimal points to 0.8% of GDP.

Households: financial asset acquisitions (% GDP) FIGURE 12

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

2005 2006 2007 2008 2009 2010 1Q11

Currency and deposits Other deposits and debt securitiesInvestment funds Shares and other equityInsurance technical reserves Other

Source: Banco de España, Cuentas Financieras. Cumulative four-quarter data.

2.3 Outlook

The IMF’s latest forecasts, published in September after the high point of the sum-mer crisis, project a world growth slowdown from 2010 rates just topping 5% to nearer 4.0% in 2011 and 2012. These figures represent a cut of three and five deci-mal points respectively over the same organisation’s June forecasts. Emerging mar-ket economies are expected to again spearhead the advance in world activity with growth rates of 6.4% in 2011 and 6.1% in 2012, compared to the considerably thin-ner 1.6% and 1.9% augured for the advanced economies, where the big talking- -point was the substantial revise-down in the growth forecasts for the United States (by 0.9 points to 1.8%) and Germany (by 0.7 points to 1.3%).

These forecasts are inevitably subject to considerable uncertainty after the latest flare-up in the European debt crisis and the weakening activity of the year’s middle months. Indeed the heightened instability of financial markets observable since spring, and attributed primarily to European debt markets is being increasingly linked to mounting fears of a new worldwide recession.

As such, the main and, without doubt, growing downside risks for these baseline scenarios have to do with: (i) prolongation of the distrust affecting certain euro-area sovereign borrowers, pushing up the costs of funding and thereby depressing activ-ity; (ii) a slowdown in growth and employment affecting leading advanced econo-mies; (iii) the need to secure public finance sustainability across a wide range of economies and, finally; (iv) the resurgent liquidity and funding problems besetting the financial sector, especially in Europe, where doubts persist over the scale and effectiveness of the restructuring process.

Forecasts by leading

organisations auguring a

global slowdown in the next few

quarters...

...are surrounded by uncertainty

since turbulence returned to

world markets...

...and estimate risk remains tilted

to the downside.


The forecasters’ consensus for the Spanish economy, after near zero growth in do-mestic activity in 2010, is just under 1% in 2011, then improving to 1.1-1.5% in 2012. The IMF’s revision of its growth projections for Spain (unchanged in 2011 and a half-a-point revise-down in 2012) is less severe than the correction applied to other advanced economies. The main uncertainties hanging over this gradual recovery scenario stem from the aggregate risk induced by sovereign debt problems and, in particular, their possible contagion to other sectors of the economy, and the possible drag effect on domestic activity of a slowdown in the dynamic economies that con-stitute its main export markets.

3 Spanish markets

3.1 Stock markets

The deepening impact of the European sovereign debt crisis and the worsening out-look for world economic activity unleashed a new wave of volatility in the year’s middle months, and sent prices tumbling in international markets for equity instru-ments. The shares of European financial institutions were among the hardest hit, reflecting their heightened exposure to the sovereign debt of the region’s more vul-nerable economies. Spanish stock markets too were caught up in the prevailing uncertainty in the form of increased volatility and a price slide mirroring that of other European bourses. It was in response to the unsettled state of some of these markets, due in part to manipulative rumour-mongering, that the securities regula-tors of Belgium, Spain,6 France and Italy, under the coordination of ESMA (Euro-pean Securities and Markets Authority), decided on 11 August to impose a tempo-rary ban on the creation or increase of short positions in financial sector shares in their respective jurisdictions (see exhibit 3 of this article).

Against this backdrop, the country’s main stock market indices posted third-quarter losses approaching 20%,7 in line with other European benchmarks, in contrast to the mild falls of the second quarter and, more strikingly, the price rally of the open-ing months (in all but Latin American securities platforms, see table 6). The Ibex 35 shed 19.3% of its value in the third-quarter period on the heels of 2% losses in the second quarter and a 7.3% price gain in the first, resulting in a year-to-date fall of 15.2%. Smaller cap indices experienced similar fortunes with declines of over 18% in the third quarter, for year-to-date losses summing 19.4% in the case of the Ibex Medium Cap and 15.8% for the Ibex Small Cap. Finally, Latin American indices contained their third-quarter losses at 9% and 11%, to close the first nine months down by 19% and 23%.

6 On 11 August last, the CNMV approved a temporary ban on transactions involving the creation or in-On 11 August last, the CNMV approved a temporary ban on transactions involving the creation or in-

crease of short positions in Spanish financial sector shares, pursuant to Article 85.2 j of Securities Markets

Law 24/1988 of 28 July and with the sole exception of market maker trades. A short position is under-

stood as one arising from a positive economic exposure to a fall in the share price. On 25 August 2011,

the CNMV extended its prohibition to 30 September 2011, with the possibility of lifting it earlier if market

conditions settle and otherwise prolonging it as an exceptional measure.

7 To 20 September.

Spain is expected to see

moderate growth, with risks

lurking mainly in debt market

tensions and the projected

deceleration of external demand.

The latest round of the European

sovereign debt crisis and

worsening prospects for world

economic growth sent stock

markets tumbling in a climate of

growing instability...

....which led to a temporary

ban on the creation or increase

of short positions in financial

shares, applied in various

European countries including

Spain.


Performance of Spanish stock market indices and sectors (%) TABLE 6

3Q11(to 20 September)

Index 2007 2008 2009 2010 1Q111 2Q111%

prior qt.%

Dec%

y/y

Ibex 35 7.3 -39.4 29.8 -17.4 7.3 -2.0 -19.3 -15.2 -22.2

Madrid 5.6 -40.6 27.2 -19.2 7.5 -2.7 -19.7 -16.0 -23.9

Ibex Medium Cap -10.4 -46.5 13.8 -5.6 6.3 -6.9 -18.6 -19.4 -19.3

Ibex Small Cap -5.4 -57.3 17.6 -18.3 17.4 -8.2 -21.9 -15.8 -18.5

FTSE Latibex All-Share 57.8 -51.8 97.2 9.0 -3.2 -9.9 -11.2 -22.6 -15.5

FTSE Latibex Top 33.7 -44.7 79.3 9.7 -3.9 -8.1 -8.6 -19.2 -16.5

Sector2

Oil and gas 1.8 -30.8 -20.1 0.3 22.5 -2.2 -12.5 4.9 15.0

Chemicals -58.4 -67.8 3.4 -60.0 30.4 5.8 -19.6 10.8 0.0

Basic materials -17.2 -45.4 23.1 -5.6 9.0 -6.6 -26.3 -25.0 -25.0

Construction mat. and construction -12.0 -51.0 25.5 -14.4 13.8 -5.7 -17.5 -11.4 -11.7

Industrial goods and services 6.9 -41.9 29.3 -1.9 4.6 -1.4 -14.1 -11.3 -11.8

Health 19.2 -45.0 17.7 -22.2 14.1 0.3 -10.8 2.0 -8.8

Utilities 18.5 -31.0 -7.8 -14.3 10.8 3.3 -22.4 -11.2 -9.7

Banks -4.5 -47.9 46.3 -32.3 7.3 -4.4 -25.5 -23.6 -38.5

Insurance -13.3 -25.0 19.8 -26.8 26.6 -1.3 -12.2 9.7 -0.7

Real estate -42.6 -58.6 -43.8 -53.2 24.2 -20.8 -32.9 -34.0 -51.6

Financial services -35.6 -44.3 20.8 12.8 22.6 -3.6 -13.0 2.8 4.4

Telecommunications and media 26.3 -31.4 23.5 -13.4 4.3 -5.4 -17.7 -18.8 -24.1

Discretionary consumption -7.7 -39.2 37.0 20.6 2.9 5.9 -5.6 2.8 0.4

Basic consumption 6.9 -22.5 -8.4 15.8 0.8 -5.4 -17.5 -21.3 -14.6

Source: Thomson Datastream.

1 Change versus previous quarter.

2 Classification according to Thomson Datastream.

All sectors shared in the third-quarter price slump in national equity markets, with losses ranging from the 7% of consumer goods (discretionary and basic) to the 33% of the real estate sector. Among the big cap players the steepest slide corresponded to the banks (-25%), telecommunications and media (-18%) and utilities (-22%), while those in the middle capitalisation bracket, like construction and materials, oil and gas and industrial goods and services, posted falls in the interval of 12% to 17%. Year-to-date, the worst performers have been real estate (-34%), basic materials (-25%), banking (-24%), basic consumption (-21%) and telecommunications and me-dia (-19%), while the firms that have best withstood the financial market stress are those in chemicals (cumulative 2011 gain of 11%), insurance (10%) and, to a lesser degree, oil and gas (5%), non-bank providers of financial services (3%), discretion-ary consumption (3%) and health and related services (2%).

The third-quarter price slide

extends to all sectors, with the

banks among the worst affected.


Exhibit 3: “The temporary ban on short selling”

On 11 August last, the securities regulators of Belgium, France, Italy and Spain, under the coordination of ESMA, jointly decided a temporary ban on the creation or increase of short positions in financial sector shares. On 28 September, the CNMV agreed to extend this measure for the second time (the first was on 25 August) until market conditions accompany.

The precautionary ban on short selling owes to the risks posed for the stability and orderly functioning of markets by the extreme volatility which for the past few months has gripped European stock markets and, particularly, financial sec-tor shares. This situation, it is feared, could lead to disorderly markets and pro-voke downward price spirals in determined shares driven by investor panics or, even, manipulative rumours or information.1 Financial institutions have been singled out for their importance in the preservation of financial stability and the containment of systemic risk. In particular, their need to raise funds continu-ously makes them vulnerable to the destructive dynamics of the “self-fulfilling prophecy” whereby a falling share price pushes up their cost of funding.

But despite these pretendedly preventive or stabilising effects, there is no de-nying that this kind of ban can impede the action of certain indicators of the quality of market functioning. Indeed numerous studies conducted in the past few years have found that restrictions on short sales curtail market efficiency and liquidity.2 And certainly in their absence, market participants have a narrower transactional range to choose from (lower liquidity) and can extract less reliable information from market prices (lower efficiency).

The experience of the Spanish market since the short selling ban was imposed last August is illuminating with regard to these effects. As we can see from the upper panel in the figure below, the average bid-ask spread of banks has widened in comparison with that of Ibex 35 shares unaffected by the ban, evidencing some deterioration in the formers’ liquidity.3 But the mid panel shows that the prohibition has allowed bank shares as a whole to outperform the rest of the market, though this boost effect appears to fade with time.4 The lower panel, fi-nally, confirms that the ban has done much to reduce the high volatility that had plagued bank shares, particularly in the days before its application.

The empirical evidence therefore suggests that disallowing short sales has helped reduce the volatility of target shares, although its apparently lasting consequenc-es for their liquidity endorse the wisdom of lifting the ban as soon as market conditions so allow. In this respect, the CNMV stated in its 28 September com-munication that the ban would be maintained for as short a time as possible, and that it would continue to coordinate its work, though ESMA, with that of other European regulators operating similar restrictions, in order to make regular as-sessments of the market situation.


The ban’s effects on the liquidity, price and volatility of target shares FIGURE E3.1

Liquidity differentialCompanies with ban – companies without ban

0

0.001

0.002

0.003

0.004

0.005

0.006

-21 -18 -15 -12 -9 -6 -3 0 3 6 9 12 15 18 21

(as a decimal)Relative bid-ask spread

Cumulative outperformanceCompanies with ban – companies without ban

-0.02-0.010.000.010.020.030.040.050.06

1 3 5 7 9 11 13 15 17 19 21

(as a decimal)

Equiweighted average of companies’ relative performance vs. the market (Ibex 35)

Volatility in the last 22 trading daysCompanies with ban – companies without ban

-0.004-0.003-0.002-0.0010.0000.0010.0020.0030.0040.0050.006

-21 -18 -15 -12 -9 -6 -3 0 3 6 9 12 15 18 21

(as a decimal)

The upper panel tracks the bid-ask spread of a wide range of companies subject or otherwise to the

prohibition. The affected companies are in this case the banks (our analysis excludes two financial services

providers and two insurance firms for the sake of a homogeneous sample). The companies unaffected are

all those listed on the Ibex 35 when the ban was imposed. Liquidity is defined by reference to relative bid-

-ask spread. The central panel shows the cumulative outperformance of target shares since the prohibition

date, defined as the difference in each share’s return relative to the return of the Ibex 35. The lower panel

charts the volatility gap between target and non-target companies, based on data for the 22 trading days

prior to the prohibition date. In all three panels, the value 0 on the Y-axis corresponds to 11 August 2011,

while negative and positive values indicate the number of trading days before and after the ban

respectively.


The P/E of the Ibex 35 prolonged its descent as far as 8 times approximately in the third quarter, below the level of year-end 2010 (around 10) and in line with other European indices. The earnings yield gap, which reflects the return premium re-quired to be invested in equity versus long-term government bonds, turned up sharply in August, after charting an even course for most of the year, and by mid-September was running at 7.7% (4.3% in early August), at a distance from both its start-out level (4.9%) and its average since 1999 (3.1%).

Earnings yield gap1 of the Ibex 35 FIGURE 13

-2

0

2

4

6

8

10

jan-99 jan-01 jan-03 jan-05 jan-07 jan-09 jan-11

%

Average Jan 99 – Sep 11 = 3.1%

Source: Thomson Datastream and CNMV.

1 Difference between stock market yield, taken as earnings/price and ten-year Spanish government yields.

Monthly data to 20 September 2011.

As figure 14 shows, both historical and intraday volatility moved up a gear in the third quarter. Ibex 35 historical volatility peaked at 65% in August, close to the heights reached during the first outbreak of the European debt crisis in May 2010 but still far short of the levels observed in the fourth quarter of 2008. By mid- -September, readings had eased back to 40%. Meantime, intraday volatility, taken as the difference between the index’s high and low prices in each trading session, peaked at 700 points in the thick of market disruption and has since cooled con-siderably.

The P/E of the Ibex 35 contracts

sharply in the third quarter...

...against a backdrop of fast-

rising volatility,...

1 See I. Goldstein and A. Guembel (2008), “Manipulation and the allocational role of prices”, in Review of

Economic Studies, vol. 75, pp. 133-164, discussing how certain manipulation strategies involving short

sales can have a lasting adverse impact on a company’s earnings (damage to client, supplier and

investor perceptions, costlier access to external finance, etc.).

2 See for instance D. Diamond and R. Verrecchia (1987), “Constraints on short-selling and asset price

adjustment to private information”, in Journal of Financial Economics, vol. 18, pp. 277-311; D. Abreu

and M. Brunnermeier (2003), “Bubbles and crashes”, in Econometrica, vol. 71, pp. 173-204; and H. Hong

and J. Stein (2003), “Differences of opinion, short-sales constraints, and market crashes”, in Review of

Financial Studies, vol. 16, pp. 487-525.

3 This analysis confines itself to the shares of the banking institutions targeted by the ban, and therefore

excludes four non-banking financial companies. The full list of issuers whose shares comes under the

prohibition can be consulted on http://www.cnmv.es/

4 The first two results concur with the international evidence gathered by A. Beber and M. Pagano (2011),

“Short-selling bans around the world: evidence from the 2007-09 crisis”, to be published shortly in the

Journal of Finance. The authors, however, make no assessment of bans’ impact on share price volatility.


Ibex 35 volatility FIGURE 14

Historical Intraday1

0

10

20

30

40

50

60

70

80

90

100

jan-05

jan-06

jan-07

jan-08

jan-09

jan-10

jan-11

jan-05

jan-06

jan-07

jan-08

jan-09

jan-10

jan-11

Unconditioned volatility Conditioned volatility

0

200

400

600

800

1000

1200

1400

Source: Thomson Datastream and CNMV. Data to 20 September.

1 Depicting the difference between the daily price highs and lows of the Ibex 35 and the average of the

last month.

This heightened volatility put the liquidity conditions of domestic equity markets under a growing strain in the second quarter which only intensified as the months progressed, with third-quarter readings resembling those of the first quarter of 2009. Specifically, the average bid-ask spread of the Ibex 35 was up to 0.14%, well above the 0.05% of the first-half period and the 0.09% average of the past six years.

Ibex 35 liquidity. Bid-ask spread (%) FIGURE 15

0.00

0.03

0.06

0.09

0.12

0.15

0.18

0.21

0.24

jan-05 jul-05 jan-06 jul-06 jan-07 jul-07 jan-08 jul-08 jan-09 jul-09 jan-10 jul-10 jan-11 jul-11

Ask/Bid

Ask/Bid (average 1m)

Source: Thomson Datastream and CNMV. Data to 20 September.

Turnover on the Spanish stock market exceeded 699 billion euros in the first three quarters of 2011 (to 20 September), 2.7% less than in the same period last year. Av-erage daily volume in the third quarter was 3.69 billion, after a year-on-year increase of 13%, just slightly below the average levels of full-year 2010 (4.05 billion euros).

...deteriorating liquidity

conditions,...

...and a conjunctural upswing in

market turnover.


The strong comeback in equity issuance over the second and the third quarter was all about the stockmarket listing of various savings banks (see table 2), as part of the restruc-turing of the Spanish financial system, and capital increases at already listed banks ahead of the new capital requirements to be introduced by Basel III. Issue volumes in these two quarters exceeded 11 billion euros, of which 67% corresponded to the above transactions. Between January and September, funds raised on domestic equity markets came to nearly 14.40 billion euros, rivalling the 16 billion raised in full-year 2010.

Turnover on the Spanish stock market TABLE 7

Million euros

2007 2008 2009 2010 1Q11 2Q11 3Q111

Electronic market 1,658,019 1,235,330 880,544 1,032,447 245,990 236,897 212,868

Open outcry 1,154 207 73 165 20 11 4

of which SICAVs2 362 25 20 8 2 3 1

MAB3 6,985 7,060 5,080 4,145 880 1,134 1,000

Second Market 193 31,50255 3 3 1 0 0

Latibex 868 757,88857 435 521 102 89 82

All exchanges 1,667,219 1,243,387 886,135 1,037,282 246,992 238,131 213,953

Pro-memoria: non resident trading (% all exchanges)

61.6 66.0 64.6 75.3 77.6 n.d. n.d.

Source: CNMV and Dirección General de Comercio e Inversiones.

1 Cumulate data from 1 July to 20 September.

2 Open-end investment companies.

3 Alternative equity market. Data since the start of trading on 29 May 2006.

n.a.: data not available at the closing date for this report.

Equity issues and public offerings1 TABLE 8

2007 2008 2009 2010 1Q11 2Q11 3Q112

CASH AMOUNTS3 (million euros) 69,955 16,349 11,391 16,013 3,237 4,797.6 6,323.4

Capital increases 67,887 16,340 11,389 15,407 3,237 4,797.6 6,323.4

Of which, through POS 8,503 292 17 959 0 3,696.4 8,4

National tranche 4,821 292 15 62 0 3,696.3 8,4

International tranche 3,681 0 2 897 0 0.1 0.0

Public offerings 2,068 10 2 606 0 0.0 0.0

National tranche 1,517 10 2 79 0 0.0 0.0

International tranche 551 0 0 527 0 0.0 0.0

NUMBER OF FILINGS4 100 54 53 69 17 23 24

Capital increases 91 53 53 67 17 22 24

Of which, through POS 8 2 2 12 0 3 3

Of which, bonus issues 19 18 11 15 2 5 6

Public offerings 12 2 1 3 0 1 0

Source: CNMV.

1 Incorporating issues admitted to trading without a prospectus being filed.

2 Data to 20 September 2011.

3 Excluding amounts recorded in respect of cancelled transactions.

4 Including all transactions registered, whether or not they eventually went ahead.

Savings banks IPOs explain the

recent surge in equity issuance.


Exhibit 4: “Green Paper on the EU Corporate Governance Framework”

The Green Paper on Corporate Governance published by the European Commis-sion in April 2011 puts forward a series of initiatives to improve the corporate governance of European companies, particularly those listed on regulated mar-kets. These initiatives are spread over the four chapters into which the paper is organised:

1. General: the report raises the ideas of creating a specific corporate governance regime tailored to small and medium-sized companies and encouraging good governance codes for unlisted firms.

2. Boards of directors: it may be necessary, the Commission says, to strengthen the diversity of non-executive members, to ensure selection is based on profes-sional qualifications, skills, and technical expertise and to require a higher level of dedication. Attention should also go to promoting greater gender di-versity and a clear separation between the board chairperson and chief execu-tive officer. Finally, it proposes introducing mandatory disclosure require-ments for directors’ remuneration and remuneration policy, which should also be put to the vote of the shareholders’ meeting.

3. Shareholders: the Commission acknowledges that the current corporate gov-ernance framework rests on the assumption that shareholders feel engaged with companies and actively concerned about the quality of their management performance. Yet it has been widely observed that most shareholders take a passive, short-termist approach. For this reason, the Commission proposes a debate on ways to overcome this disinterest, increase institutional investors’ involvement in corporate governance and convince shareholders to adopt a longer-term outlook and investment strategy. It also looks at ways to strength-en minority shareholder protection vis à vis controlling shareholders in cases like related-party transactions.

4. Application of the “comply or explain” framework: the Commission expresses its concern about the shortcomings detected in the application of “comply or explain”. This occurs basically because companies’ explanations for departures from their respective codes are of poor informative quality, and because mech-anisms are lacking for effective compliance monitoring. To this end, the Green Paper proposes more stringent requirements and tighter quality monitoring and analysis of the information companies supply in their corporate gover-nance statements, over and above that performed by shareholders. The Com-mission refrains from comment regarding the proper functions or legal status of the authority charged with such monitoring, but solicits stakeholders’ views on what these functions should be.

The consultation round concluded on 22 July, and the European Commission will now review its proposals in the light of stakeholder responses and decide on fu-ture action at the Community level.


3.2 Fixed-income markets

The climate on domestic fixed-income markets was again dominated by the ongoing crisis in European sovereign debt markets, which gained new intensity in early Au-gust, sending Spanish government bond yields and spreads to record highs. The decision by the European Central Bank to purchase euro-area bonds on the second-ary market plus other measures taken nationally helped contain the upward spiral in sovereign spreads that over the course of August had sucked in a fair proportion of Europe’s economies. But nor did spreads abate to any meaningful extent. In Sep-tember, both debt markets and sovereign risk premiums tensed once more amid gathering fears of a slowdown in the world economy.

In this context, treasury bill rates, which had headed significantly lower in the open-ing quarter, began rising again to early August before falling once more in the weeks that followed. Between March and September, rates on three-, six- and twelve-month bills gained an average of 43, 92 and 100 basis points to 1.4%, 2.3% and 3.1% respectively (see table 9) – still well below the rates of late 2010 in the thick of the Irish debt crisis.

Short-term interest rates1 (%) TABLE 9

Dec 08 Dec 09 Dec 10 Mar 11 Jun 11 Sep 11

Treasury bills

3 month 0.44 1.63 0.96 1.46 1.39

6 month 0.61 2.76 1.40 1.84 2.32

12 month 0.88 3.26 2.10 2.63 3.10

Commercial paper 2

3 month 3.09 0.76 1.37 1.29 1.57 1.67

6 month 3.63 1.25 2.52 2.03 2.12 2.50

12 month 3.74 1.63 3.04 2.66 2.73 2.94

Source: Banco de España and CNMV.

1 Average daily data. September data to 20/09.

2. Interest rates at issue.

In private fixed-income markets, short-term rates dropped rather less than their public debt equivalents in the first quarter of 2011,8 and also rose more gently in the second and the third quarters. Hence the interest rate on three-, six- and twelve- -month commercial paper climbed by 38, 47 and 28 basis points on average to 1.7%, 2.5% and 2.9% respectively.

After an opening stretch in which rates were flat, or even falling in the case of three-and five-year maturities, long government bond yields initiated an upward trajec-tory in April that intensified throughout July. By the first days of August, the 10-year bond was trading at highs ahead of 6%, a reading not seen since November 1997. Thanks to the ECB’s government bond purchases on the secondary market, Spanish

8 In fact, average interest rates on three-month commercial paper rose slightly between December 2010

and March 2011.

In domestic fixed-income

markets, government bond

yields and spreads scale new

heights in early August.

Short-term interest rates also rise

on both government...

...and corporate paper.

Long-term government yields

are stabilised by ECB bond

buying after reaching their

highest levels since 1997.


government yields and those of other European economies like Italy, Portugal, Ire-land and Belgium came down sharply in just a few days (by over 130 bp in Spain’s case). But by early September, they were rising again as far as 3.8%, 4.5% and 5.2% at three, five and ten years respectively on the closing date for this report.

Long-term corporate bonds performed broadly similarly over the first six months of the year, with initially falling yields giving way to a renewed increase in the second quarter. Unlike with public debt, however, the run-up in yield persisted through the third quarter. Between March and September, corporate bond yields climbed 111 bp, 83 bp and 98 bp in three-, five- and ten-year maturities respectively as far as 4.9%, 5.6% and 7.0%.

Medium and long government and corporate bond yields1 TABLE 10

% Dec 08 Dec 09 Dec 10 Mar 11 Jun 10 Sep 11

Government bonds

3 year 3.05 1.95 3.87 3.41 4.07 3.82

5 year 3.41 2.67 4.65 4.30 4.70 4.45

10 year 3.86 3.75 5.38 5.25 5.48 5.22

Corporate bonds

3 year 5.45 3.14 4.31 3.79 4.51 4.90

5 year 5.99 4.30 5.44 4.75 5.40 5.58

10 year 6.08 4.88 6.42 5.98 6.90 6.96

Source: Reuters and CNMV.

1 Monthly average of daily data. September data to 20/9.

After opening with a downward run that bottomed at 174 bp,9 Spanish long-term bond spreads over the German benchmark were driven higher once more as doubts grew about the sustainability of Greece’s public finances and investors turned dis-trustful eyes on other European economies. After an early August peak of 390 bp,10 Spanish sovereign spreads tightened to below 300 bp, until renewed uncertainty at the start of September sent them back above the 360 bp mark (see figure 16).

As in previous episodes of European debt market turmoil, sovereign risk contagion from more troubled economies to the rest was readily apparent. According to the estimates shown in figure 5 below, in Spain’s case, over 65% of the variability in sovereign spread attributable to recent newsflow may have derived from contempo-raneous shocks in Greek credit risk. This degree of contagion is consistent with the levels observed during the first Greek crisis, in May 2010, and also with estimates made for other European economies like Italy, France and Belgium.

9 12 April.

10 In intraday terms, spreads at times exceeded 400 basis points.

Corporate bond yields keep on

rising into September.

The rise in sovereign risk

affecting Spain and other

European economies...

...was largely due to doubts

surrounding the sustainability of

Greece’s public finances...


RiskpremiumofSpanishgovernmentdebt1 FIGURE 16

0

50

100

150

200

250

300

350

400

450

jan-08 jul-08 jan-09 jul-09 jan-10 jul-10 jan-11 jul-11

basis points

CDS Spanish bond CDS German bond Yield spread 10Y Spanish/German bond

Source: Thomson Datastream.

1 Data to 20 September.

This contagion phenomenon not only shaped the risk premium movements of sover-eign states but also those of a banking sector which, in Spain’s case, was already immersed in an intense restructuring process. As we can see from figure 17, the average five-year CDS premiums of Spanish financial institutions climbed to highs approaching 700 bp against the average 340 bp approximately of non-financial issu-ers. According to the synthetic contagion indicator in figure 18, at times of maxi-mum turbulence, a sizeable portion (around 65%) of the variability in Spanish banks’ average CDS ascribable to recent newsflow may derive from contemporane-ous shocks in the sovereign risk of Spanish government bonds.

Aggregateriskpremium1basedonthefive-yearCDSofSpanishissuers FIGURE 17

0

100

200

300

400

500

600

700

800

jan-08 may-08 sep-08 jan-09 may-09 sep-09 jan-10 may-10 sep-10 jan-11 may-11 sep-11

basis points

Private sector average Financial entities Non-financial entities

Source: Thomson Datastream and CNMV.

1 Simple average. Data to 20 September.

...which also dragged in the

area’s banks.


Sovereign-financial contagion in Spain1 FIGURE 18

-100

-75

-50

-25

0

25

50

75

100

jul-08

oct-08

jan-09

apr-09

jul-09

oct-09

jan-10

apr-10

jul-10

oct-10

jan-11

apr-11

jul-11

0

50

100

150

200

250

300

350

400

450

500basis points

Sovereign-financial contagion indicator

CDS Spanish bond (right-hand scale) %

1 This figure shows the percentage of variance in the average CDS indices of the Spanish banking sector and

the CDS of the Spanish sovereign bond that is not attributable to their historical information but to

contemporaneous return shocks. The resulting contagion indicator is decreasing with the increase in

relative intensity of the impact of specific sovereign risk shocks on financial sector CDS. Positive values

indicate a net contagion effect from the banking to the sovereign sector, while with negative values the

source of the contagion is the sovereign risk carried by Spain. Contagion on a given day is calculated from

available data for the 60 days preceding the current date, with the series also filtered by 30-day moving

averages. Data to 20 September.

Exhibit 5: “Asset securitisation markets: Joint Forum recommendations”

In mid-2010, the Joint Forum received a mandate to advise its parent committees1 and the Financial Stability Board (FSB) on developing a coordinated suite of pol-icy responses to facilitate the regulation of sustainable securitisation markets.

In July 2011, the Joint Forum published a paper setting out the main conclusions of the work done under this mandate.2 It describes the incentives which drove participation in the securitisation markets by originators, issuers, arrangers and investors before the financial crisis and analyses how those incentives have changed since then. It also reviews the academic literature on the subject and cata-logues the main regulatory responses undertaken to date, considering both how they have been received by leading members of the international finance industry and how they might influence the future direction of securitisation markets.

While expressly acknowledging the potential benefits of securitisation, the Joint Forum paper also advocates reforms to correct the distortions and excesses brought to light by the financial crisis. And it is with this dual goal, of helping to stimulate securitisation markets while correcting their deficiencies, that the Joint Forum puts forward a series of recommendations directed at the competent au-thorities. One overarching need, it emphasises, is to develop rules that are mutu-ally consistent, globally applicable, while allowing for local market circumstances, and implemented in a timely manner, so uncertainty about future regulation does not pose an impediment to market recovery.


The resulting recommendations are as summarised below:

1. Authorities should employ a broad tool kit to address misaligned incentives

The Joint Forum provides a checklist for action in this respect:

– Require originators or securitisers to retain an appropriate amount of risk in the securitisation transaction.

– Improve the quality of origination and underwriting practices or standards for assets eligible to be securitised.

– Provide guidance to investors on the analyses they should run to arrive at a fair valuation of securitisation products.

– Strengthen the warranties required of originators and issuers regarding the processes they have undertaken in relation to asset pools.

– Craft measures to discourage investors from relying automatically on credit ratings in reaching their decisions.

– Improve accompanying documentation to clarify the duties of advisors and service providers, including setting out obligations to manage conflicts of interest.

– Provide guidance on (or mandate) remuneration schemes which are linked to the long-term performance and quality of the assets.

2. Authorities should encourage the markets to improve transparency

The Joint Forum sees improving the quality and readability of the information available to investors and regulators as an important element of developing a sustainable securitisation market. The paper considers that this is not just a mat-ter for the private sector, but that regulators should come actively on board by tightening up mandatory informative requirements.

3. Authorities should encourage a greater degree of document standardisation and a reduction of product complexity

The Joint Forum contends, furthermore, that the drive towards reduced product complexity and greater document standardisation should be co-led by financial institutions (in sponsoring and structuring securitisations), legal firms and inves-tors, with the authorities providing support to their efforts. The hope is that ad-vances on this front will reduce information asymmetries and create the founda-tion for a more liquid secondary market for structured products.

1 The Basel Committee on Banking Supervision (BCBS), the International Organisation of Securities

Commissions (IOSCO) and the International Association of Insurance Supervisors (IAIS).

2 Report on asset securitisation incentives, available at http://www.bis.org/publ/joint26.pdf.

http://www.bis.org/publ/joint26.pdf


The stressed state of European sovereign debt markets also took its toll on primary bond market issuance. The volume of fixed-income issues registered with the CNMV plunged to just over 25 billion euros in the third quarter, 54% down versus the year- -ago period, after a 26% advance in the first six months to 137 billion euros. This left year-to-date issuance at 162 billion, 1.3% less than in 2010 (see table 11). Financial institutions again had the fixed-income market virtually to themselves, and account-ed for no less than 99% of funds captured in the period. Commercial paper re-mained the most popular financing instrument, with the 10.37 billion euros sold amounting to 41% of issue volumes. Next in importance were asset-backed securi-ties (29% of the total) and covered bonds in their mortgage (17%) and territorial (10%) variants.

Covered bonds were the only instruments to escape the third-quarter stall in issu-ance. The biggest slide corresponded to non-convertible bonds and debentures, whose third-quarter issuance dropped to 733 million euros (-43%) for a year-to-date total of 6.63 billion (-61%).

After running ahead of last year’s figures for the first six months of 2011, issuance of asset-backed securities tailed off in the third quarter to 7.45 billion euros (28.19 billion in third quarter 2010), giving a year-to-date decline of 3.3%. Note that the assets issued in securitisation deals were retained in their totality by the origina-tors of the securitised loans, primarily for use as collateral in Eurosystem credit op-erations.

Financial institutions retained their preference for mortgage bonds. Though third- -quarter issuance of these instruments was on a rather more modest scale, the year- -to-date figure is already ahead of 42 billion euros, eight thousand more than the full-year total for 2010. Also coming up fast are territorial covered bonds, with a positive change in issuance over the third quarter and year-to-date.

Foreign debt financing, again a much-used resource, conserved its relative weight in Spanish issuance at just over a third of the year-to-date total, albeit with some slip-page in straight-number terms (see table 11). To 31 July, Spanish firms raised 88.39 billion euros on international markets, breaking down 50.59 billion via com-mercial paper and the rest via bonds and debentures.

Sovereign debt market tensions

also cut deeply into private debt

issuance...

...with the contraction extending

to all debt instruments (except

covered bonds).

Issuance of non-convertible

bonds and debentures is down

61% year-to-date against

the -3.3% of asset-backed

securities...

...while covered bonds are

increasingly the debt instrument

of choice.

Foreign issuance was again a

much-used resource for Spanish

firms.


Gross fixed-income issuance TABLE 11

2011

filed1 with the CNMV 2007 2008 2009 2010 1Q11 2Q11 3Q112

NUMBER OF ISSUES 335 337 512 349 88 82 44

Mortgage bonds 32 47 75 88 32 29 8

Territorial bonds 8 8 1 9 4 4 10

Non-convertible bonds and debentures 79 76 244 154 19 27 12

Convertible/exchangeable bonds and debentures 0 1 6 3 6 1 0

Asset-backed securities 101 108 76 36 10 9 7

Commercial paper facilities 107 88 73 59 15 12 7

Securitised 3 2 2 2 0 1 0

Other commercial paper 104 86 71 57 15 11 7

Other fixed-income issues 3 0 0 0 0 0 0

Preference shares 5 9 37 0 2 0 0

FACE VALUE (million euros) 648,757 476,276 387,476 226,449 77,161 59,900 25,471

Mortgage bonds 24,696 14,300 35,574 34,378 19,254 18,980 4,250

Territorial bonds 5,060 1,820 500 5,900 2,935 1,800 2,664

Non-convertible bonds and debentures 27,416 10,490 62,249 24,356 2,578 3,320 733

Convertible/exchangeable bonds and debentures 0 1,429 3,200 968 682 1,500 0

Asset-backed securities 141,627 135,253 81,651 63,261 26,585 11,168 7,449

Domestic tranche 94,049 132,730 77,289 62,743 23,706 10,130 7,449

International tranche 47,578 2,522 4,362 518 2,879 1,038 0

Commercial paper2 442,433 311,738 191,342 97,586 24,928 23,131 10,375

Securitised 465 2,843 4,758 5,057 546 913 259

Other commercial paper 441,969 308,895 186,583 92,529 24,382 22,218 10,116

Other fixed-income issues 7,300 0 0 0 0 0 0

Preference shares 225 1,246 12,960 0 200 0 0

Pro memoria:

Subordinated issues 47,158 12,950 20,989 9,154 5,408 4,207 1,640

Covered issues 86,161 9,170 4,794 299 10 0 0

2011

abroad by Spanish issuers 2007 2008 2009 2010 1Q11 2Q11 3Q114

FACE VALUE (million euros) 103,631 112,366 149,686 127,731 48,148 34,121 6,117

Long-term 65,629 39,894 47,230 51,107 21,511 13,920 2,364

Preference shares 2,581 0 3,765 0 0 0 0

Subordinated debt 8,984 70 2,061 0 0 0 0

Bonds and debentures 53,327 39,360 41,404 50,807 21,511 13,920 2,364

Asset-backed securities 736 464 0 300 0 0 0

Short-term 38,003 72,472 102,456 76,624 26,637 20,201 3,753

Commercial paper 38,003 72,472 102,456 76,624 26,637 20,201 3,753

Securitised 12,119 425 108 248 97 75 0

Source: CNMV and Banco de España.

1 Incorporating issues admitted to trading without a prospectus being filed.

2 Data to 20 September.

3 Figures for commercial paper issuance correspond to the amount placed.

4 Data for the month of July.


4 Market agents

4.1 Investment vehicles

Financial UCITS11

Assets under management in investment funds fell by 2.5% to just over 140 billion euros in the first six months of 2011 (see table 13), prolonging the trend initiated in 2008. The cause, once more, was net redemptions, which summed almost five bil-lion euros in the period – nonetheless a small improvement on previous semesters. The instruments carried in investment fund portfolios appreciated slightly in the first two quarters, albeit with considerable cross-category heterogeneity. Thus, while fixed-income funds kept up positive returns throughout the first-half period, equity funds saw their first-quarter gains turn to second-quarter losses, in line with the overall performance of stock markets.

Investment fund subscriptions and redemptions (million euros)1 TABLE 12

Subscriptions Redemptions

Category 3Q10 4Q10 1Q11 2Q11 3Q10 4Q10 1Q11 2Q11

Fixed income2 6,207 6,603 7,890 6,478 12,006 13,908 13,298 8,737

Balanced fixed income3 572 641 358 517 812 1,384 1,138 892

Balanced equity4 119 255 270 346 168 317 267 446

Euro equity5 291 335 575 524 452 534 595 454

Intern. equity6 779 1,227 2,489 721 626 982 2,521 801

Fixed-income

guaranteed

3,404 2,506 7,424 2,595 1,414 1,719 2,008 2,224

Equity guaranteed7 727 1,247 829 622 1,400 2,550 1,625 1,717

Global funds 265 1,767 1,534 836 383 1,581 507 598

Passively managed8 74 96 221 149 142 254 237 108

Absolute return8 959 1,334 1,166 382 1,039 1,350 1,332 1,290

Hedge funds 21 31 30 – 72 41 24 –

Funds of hedge funds 14 10 2 – 24 57 -30 –

Total 13,432 16,052 22,788 13,170 18,538 24,677 23,522 17,267

Source: CNMV.

1 Estimate only.

2 Includes: Euro and international fixed income and money market funds.

3 Includes: Balanced euro fixed income and balanced international fixed income.

4 Includes: Balanced euro equity and balanced international equity.

5 Includes: Euro equity.

6 Includes: International equity.

7 Includes: Guaranteed and partially guaranteed equity.

8 New categories as of 2Q09. All absolute return funds were previously classed as global funds.

11 Although this classifi cation includes hedge funds and funds of hedge funds, we make no separate refer-Although this classification includes hedge funds and funds of hedge funds, we make no separate refer-we make no separate refer-

ence to them here, since they are the subject of their own sub-section further ahead.

Redemptions take a further

2.5% slice from investment fund

assets...


As we can see from table 12, fixed-income funds suffered the largest outflows – more than 7.60 billion euros – especially during the first quarter. Equity guaranteed funds were the other big losers (net redemption of almost 1.90 billion euros), while fixed-income guaranteed funds bucked the trend with net inflows of nearly 5.80 bil-lion euros. Global funds also did well with net subscriptions exceeding 1.25 billion in the first six months of 2011. The result was a decline in the relative weight of the standard fixed-income segment in favour of fixed-income guaranteed funds. The former group saw their share drop from over 50% of total fund assets to 35% in the month of June, while fixed-income guaranteed funds rose from relative obscurity to take an industry share of 23%.

Fund numbers dropped in the six-month period after a brief revival in the opening quarter, although the scale of decline was less than in preceding years. Finally nine-teen funds ceased operation for a new total of 2,389. The main contributing factor was again fund mergers, which were nonetheless fewer than in previous quarters. Unitholder numbers too shrank by 2.3% to just over five million between end-2010 and June 2011. All categories shared in the decline except global and fixed-income guaranteed funds, where the number of participating investors rose by 17.4% and 25.4% respectively.

The latest analyses of the liquidity conditions of funds’ private fixed-income holdings reveal a significant fall in the volume of less-liquid assets during the first and second quarters of 2011, from 10.64 billion at the year’s outset to 9.19 billion at the end of June (see table 14). Their weight in industry assets likewise declined from the 7.4% of December 2010 to 6.6% in June, prolonging the trend initiated in 2009. This lower exposure to less-liquid instruments held true for all asset categories ex-cept high-grade financial fixed income (rated AAA/AA), which registered a slight increase. Moreover 70% of the reduction in exposure assets traced to lower holdings of less-liquid asset-backed securities; down from 3.26 billion euros at end-2010 to 2.25 billion in June 2011.

...especially in fixed-income

categories.

Both fund and unitholder

totals fall once more between

December 2010 and June 2011.

The sum of less-liquid assets

drops from 7.4% of total fund

assets in December 2010 to 6.6%

in June 2011.


Main investment fund variables* TABLE 13

2008 2009 2010 2010 2011Number 3Q 4Q 1Q 2QTotal investment funds inversión 2,912 2,536 2,408 2,421 2,408 2,417 2,389Fixed income1 629 582 537 540 537 543 530

Balanced fixed income2 195 169 160 162 160 158 152

Balanced equity3 202 165 138 140 138 136 132

Euro equity4 237 182 172 174 172 171 157

International equity5 330 242 232 233 232 222 222

Fixed income guaranteed 260 233 276 261 276 303 324

Equity guaranteed6 590 561 499 518 499 485 470

Global funds 469 187 192 189 192 197 203

Passively managed7 69 61 61 61 61 57

Absolute return7 146 141 143 141 141 142

Assets (million euros)Total investment funds 175,865.3 170,547.7 143,918.2 152,646.5 143,918.2 144,428.0 140,351.3Fixed income1 92,813.1 84,657.2 56,614.6 64,102.1 56,614.6 51,565.6 49,449.9

Balanced fixed income2 5,803.0 8,695.5 7,319.0 8,109.9 7,319.0 6,570.0 6,251.9

Balanced equity3 3,958.8 3,879.6 3,470.5 3,520.2 3,470.5 3,484.5 3,345.6

Euro equity4 5,938.9 6,321.6 5,356.8 5,504.4 5,356.8 5,656.3 5,687.2

International equity5 4,254.7 5,902.4 8,037.3 7,203.6 8,037.3 7,896.1 7,751.6

Fixed income guaranteed 21,150.3 21,033.4 26,180.2 25,795.6 26,180.2 32,084.4 32,742.1

Equity guaranteed6 30,873.7 25,665.8 22,046.5 23,600.0 22,046.5 21,181.6 19,827.6

Global funds 11,072.8 3,872.5 4,440.3 4,093.9 4,440.3 5,481.7 5,718.1

Passively managed7 3,216.6 2,104.8 2,323.6 2,104.8 2,193.0 2,172.2

Absolute return7 7,303.0 8,348.1 8,393.2 8,348.1 8,314.8 7,405.1

Unitholders

Total investment funds 5,923,346 5,475,403 5,160,888 5,348,482 5,160,888 5,160,482 5,044,106Fixed income1 2,204,652 2,041,487 1,622,664 1,745,366 1,622,664 1,525,292 1,466,938

Balanced fixed income2 277,629 290,151 270,341 280,230 270,341 251,992 238,275

Balanced equity3 209,782 182,542 171,336 182,860 171,336 162,861 156,631

Euro equity4 377,545 299,353 266,395 280,566 266,395 253,365 248,355

International equity5 467,691 458,097 501,138 502,463 501,138 493,052 493,057

Fixed income guaranteed 538,799 570,963 790,081 762,369 790,081 967,561 990,997

Equity guaranteed6 1,402,948 1,188,304 1,065,426 1,115,180 1,065,426 1,027,392 981,572

Global funds 444,300 88,337 105,719 110,538 105,719 114,244 124,088

Passively managed7 85,403 90,343 93,049 90,343 85,254 82,371

Absolute return7 270,766 277,445 275,861 277,445 279,469 261,822

Return8 (%)Total investment funds -4.21 5.73 0.35 1.64 -0.04 0.95 0.03Fixed income1 2.06 1.91 0.11 0.63 -0.35 0.63 0.33

Balanced fixed income2 -7.14 6.85 -0.54 1.82 -0.56 0.9 0.09

Balanced equity3 -22.21 16.47 -0.98 4.67 0.78 2.23 -0.31

Euro equity4 -39.78 32.41 -2.94 10.11 1.27 6.11 -0.45

International equity5 -41.71 37.28 14.22 5.35 8.01 -0.49 -1.15

Fixed income guaranteed 3.29 3.81 -0.67 0.89 -1.28 0.89 0.36

Equity guaranteed6 -2.61 3.56 -1.79 1.20 -1.45 0.71 -0.48

Global funds -8.64 10.90 3.22 2.80 1.87 0.98 -0.14

Passively managed7 - -2.36 6.32 0.31 3.74 -0.30

Absolute return7 - 1.53 1.17 0.58 0.28 -0.35Source: CNMV. As a result of the reclassifying of investment fund objectives, in force from 1 April 2009, some changes have taken place in the variables of this table.* Data for funds that have filed financial statements (i.e., not including those in the process of winding-up or liquidation).1 Includes: Euro and international fixed income and money market funds.2 Includes: Balanced euro fixed income and balanced international fixed income.3 Includes: Balanced euro equity and balanced international equity.4 Includes: Euro equity.5 Includes: International equity6 Includes: Guaranteed and partially guaranteed equity.7 New categories as of 2Q09. All absolute return funds were previously classed as global funds.8 Annual return for 2008, 2009 and 2010. Quarterly data comprise non-annualised quarterly returns.


Estimated liquidity of investment fund assets TABLE 14

Less-liquid investments

Million euros % total portfolio

Type of asset Dec 10 Mar 11 Jun 11 Dec 10 Mar 11 Jun 11

Financial fixed income rated AAA/AA 4,374 4,335 4,391 22.4 22.5 22.8

Financial fixed income rated below AAA/AA 2,798 2,702 2,384 23.7 23.3 20.6

Non-financial fixed income 218 190 171 3.8 4.7 4.2

Securitisations 3,260 2,567 2,246 61.0 56.8 49.7

AAA-rated securitisations 1,429 919 609 62.8 74.3 49.3

Other securitisations 1,831 1,648 1,636 59.7 50.2 49.8

Total 10,651 9,794 9,192 29.2 28.1 26.0

% of investment fund assets 7.4 6.8 6.6

Source: CNMV.

Exhibit 6: “Circular 3/2011 of 9 June modifying UCITS investment policies”

Circular 3/2011 of 9 June (BOE 27 June) partially amends CNMV Circular 1/2009 of 4 February on UCITS categories based on investment policy. The new text, which came into force two months after its publication in the Boletín Oficial del Estado (BOE), aims to align the definition of money market funds with the com-mon definition issued by the Committee of European Securities Regulators (CESR), replaced in early 2011 by the European Securities and Markets Authority (ESMA), while introducing a series of technical improvements.

One of the big novelties of the amended Circular refers to the common definition of money market funds developed by the CESR (see document CESR/10-049). As a result of this new definition, the money market policy described in Circular 1/2009 is replaced by two new policies titled “short-term money market” and “money market”. This change is in order to avoid conflicting definitions circulat-ing around Europe and thereby to ensure investors standard protection as well as clearer information about the product they are investing in.

Although short-term money market funds must meet stricter duration and matu-rity requirements than their money market counterparts, both products share certain core features: namely, zero exposure to equity instruments, exchange rate risk or commodities; the goal of preserving capital while providing returns in line with money market rates; subscription and redemptions on a daily basis; and investment in money market instruments and deposits complying with the terms of Article 36.1 a), e) and h) of the Regulation on Collective Investment Undertak-ings and Article 16 of Order EHA/888/2008 on derivative products. All instru-ments should be of high quality in the judgement of the management company, which should consider, at least, their credit rating (as the case may be), the asset class they represent, counterparty and operational risk in the case of structured financial products, and, finally, their liquidity profile. Regarding credit quality, the minimum requirement is to hold a short-term credit rating of at least A2 (according to the scale used by Standard & Poor’s) or equivalent from all the


Real estate investment schemes

Real estate schemes continue to operate in a troubled environment, characterised by the prolonged downturn in Spanish real estate and a gathering outflow of investors since the year 2008. Latest data (for July 2011) put the number of real estate funds at seven, the same figure as in December 2010.12 But only five of these funds were actually in operation, one of which had resumed business in March after lifting its suspension of redemptions. In four out of the five active funds, a large proportion of assets (ranging from 45% to 98%) were held by investors from the manager’s fi-nancial group. All five also had at least one liquidity window in the year’s first half which went ahead without incident.

12 Although eight funds fi gured on the register at end-2010, one had been eff ectively liquidated in Decem-Although eight funds figured on the register at end-2010, one had been effectively liquidated in Decem-

ber. This fund finally left the register in July 2011.

The real estate investment

sector loses mass in the face of

manifold difficulties...

agencies that have rated the instrument. If the asset has no specific rating, it should nonetheless be of an equivalent quality as determined by the manage-ment company.

The specific features of each fund category are as follows:

– Short-term money market funds: authorised to invest in other UCITS fitting the definition of short-term money market funds, average portfolio duration of less than or equal to 60 days, average portfolio maturity of less than or equal to 120 days and residual maturity to the legal redemption date of less than or equal to 397 days.

– Money market funds: authorised to invest in other UCITS fitting the defini-tion of either short-term money market funds or money market funds, aver-age portfolio duration of less than or equal to six months, average portfolio maturity of less than or equal to two years and residual maturity to the legal redemption date of less than or equal to 397 days. Money market funds may hold sovereign debt with a minimum rating of BBB- (on the Standard & Poor’s scale) or equivalent, awarded by one or more recognised credit rating agencies.

The Circular also introduces a series of technical improvements for calculating the percentage of fixed-income and equity investment of each type of fund. For instance, it is now funds’ total exposure that counts in defining its investment policy, i.e. the sum of its investments in spot and derivative instruments. Also computing for this purpose will be currency risk and investment in equity securi-ties issued by entities from outside the euro area.

Finally, no additional exposure will be considered to arise if a fund’s investments in spot or derivative financial instruments are materialised, among others, in public debt instruments issued by a state meeting the requirements set out in Article 38.2 b) of the UCITS Regulation or repos on the same, subject in both cases to maturity being of under three months and the issuer being of high credit quality.


As we can see from table 15, assets under management in real estate funds con-tracted in the first six months, though less so than in the three preceding years, es-pecially 2008. By July 2011, funds had 5.98 billion euros assets in their charge, 2.2% less than at end-2010, while unitholder numbers had tumbled 58% to 31,591. Note, however, that most of the slump owed to one particular fund, where the manager’s financial group invited investors so wishing to exit the scheme after its redemptions embargo came to end, subscribing for a sufficient amount to fill the resulting re-demption orders. Meantime, fund returns continued to sink, though not quite as deeply as in the preceding quarters.

Real estate investment companies fared similarly to funds in the January to July period, though with a rather gentler decline that skimmed over three million euros off their total assets to 317 million. Shareholder numbers were unchanged at 943 while a total of eight companies remained on the register.

Main real estate scheme variables TABLE 15

2010 2011

2007 2008 2009 2010 4Q 1Q 2Q 3Q2

FUNDS

Number1 9 9 8 7 7 7 7 7

Unitholders 145,510 97,390 83,583 75,280 75,280 33,747 31,963 31,591

Assets (million euros) 8,609 7,407 6,465 6,116 6,116 6,083 5,995 5,983

Return (%) 1.3 0.7 -8.3 -4.7 -0.9 -0.67 -0.65 -0.23

COMPANIES

Number 9 9 8 8 8 8 8 8

Shareholders 843 937 928 943 943 943 943 943

Assets (million euros) 513 372 309 322 322 320 318 317

Source: CNMV.

1 Funds filing financial statements.

2 Data for July 2011. In this case, the stated return corresponds to the month of July.

Hedge funds

Hedge funds have performed unevenly throughout the crisis, with funds of hedge funds coming out worse. This sub-sector’s key variables have been deteriorating steadily since the peak levels of 2008. The number of schemes has fallen away from 40 in 2008 to just 27 in mid-2011,13 assets under management are down from 1.02 billion to 650 million euros and unitholder numbers have just about halved (from 8,151 in 2008 to 4,181 in May 2011). And their aggregate returns have fared no bet-ter, declining from 7.8% in 2009 to 3.1% in 2010 and close to zero in 2011.

13 A total of seven funds of hedge funds were in liquidation at the closing date for this report (with five

more having advised the CNMV of their intention to liquidate).

...leaving just five funds in active

operation.

Real estate investment

companies have a slightly

smoother ride.

Funds of hedge funds continue

to underperform pure hedge

funds...


Main hedge fund and fund of hedge fund variables TABLE 16

2010 2011

2007 2008 2009 2010 3Q 4Q 1Q 2Q2

FUNDS OF HEDGE FUNDS

Number1 31 40 38 28 33 28 28 27

Unitholders 3,950 8,151 5,321 4,404 4,901 4,404 4,240 4,181

Assets (million euros) 1,000.6 1,021.3 810.2 694.9 726.8 694.9 667.2 650.3

Return (%) -0.43 -17.8 7.85 3.15 -0.1 2.13 -0.01 -0.03

HEDGE FUNDS 21 24 29 33 33 33 33 35

Number1 1,127 1,589 1,917 1,852 1,925 1,852 1,958 1,984

Unitholders 445.8 539.4 652.0 646.2 639.3 646.2 693.5 719.0

Assets (million euros) 0.84 -4.82 14.94 5.37 2.97 3.11 1.79 1.18

Return (%)

Source: CNMV.

1 Schemes that have filed financial statements.

2 Data to May. The return stated corresponds to April and May.

Hedge funds, meantime, have seemingly pulled out of the crisis downturn and en-tered a new expansion phase, to judge by the year-to-date resurgence in funds in operation, unitholder numbers and managed assets. Fund returns have consistently outperformed those of the fund of hedge funds sub-sector. As table 16 shows, the number of schemes has grown each year since they were first authorised. By mid- -2011, a total of 35 hedge funds were registered with the CNMV, two more than at end-2010 and six more than in 2009. Assets under management resumed solid growth in the first two quarters of 2011 after dipping slightly in 2010, while unitholder numbers traced a similar pattern. The upshot was that by mid-year 2011, hedge funds had 719 million euros under management (646 million at end-2010) and a total of 1,984 investors on the books (1,852 at end-2010).

...which have even entered a

tentative expansion phase.

Exhibit 7: “ESMA technical advice to the European Commission on level 2 implementing measures for the Alternative Investment Fund Managers

Directive”

At end-2010, the European Commission called on ESMA to assist in preparing the level 2 measures envisaged in the Alternative Investment Fund Managers Direc-tive or AIFMD. After due examination, ESMA published a consultation paper last summer setting out its draft advisory document and inviting feedback from ex-ternal stakeholders. The definitive advice will be submitted to the European Com-mission on 15 November 2011. The Commission will then use its contents to draw up proposed AIFMD level 2 measures in the course of 2012 and the full legislative package will foreseeably come into force around mid-year 2013.

ESMA’s draft technical advice develops the Directive’s provisions on its scope of application, the organisational requirements of alternative fund managers,


depositary appointment and duties, and transparency and leverage, as well as filling out its varied precepts on relations with third countries and supervisory cooperation. Set out below are the main contents of the draft advisory document.

Scope of application of the Directive

In fulfilment of the Commission’s mandate, the document makes proposals on cal-culating the value of assets under management to determine where managers stand in relation to the threshold for full compliance with the Directive (100 million euros or 500 million in the case of non-leveraged closed-ended funds). On this score, the draft proposes that assets under management be calculated annually at least on the basis of the latest net asset value, including any assets acquired through leverage. It also advises a course of action for cases where managers with fewer assets and there-fore subject only to registration and reporting requirements move above the full compliance threshold (the situation should not be seen as of a temporary nature if it persists for more than three months). Finally, it specifies the registration require-ments binding on managers below the threshold and the procedure they should follow if they choose to seek authorisation under the AIFMD (opt-in procedure).

Organisational requirements

Regarding the organisation of alternative investment fund managers, the draft advice draws on the rules laid down in UCITS and MiFID directives, adjusted as necessary to the specifics of the alternative management sector (and the diversity of alternative investment funds in operation). It accordingly puts forward ideas for general organisational arrangements, and for the management of risk, liquid-ity and conflicts of interest.

Further to the level 1 obligation for alternative fund managers to maintain addi-tional funds to cover the potential risks arising from professional negligence, the two options posed acknowledge the particularities of the alternative investment sector rather than directly applying the Capital Requirements Directive regime, which allow for no such distinctions. These options are: 0.01% of the value of as-sets under management, or else 0.0015% of the value assets under management plus 2% of income from management activities.

Finally, the text makes proposals on valuation (general guidelines and the recom-mendation that non-financial assets should be valued at least once a year), on al-ternative fund investments in securitisations (for compliance by both originator and manager whenever managed funds take securitisation positions – a requisite also to be applied to UCITS) and on delegation (two cases are envisaged that serve as justification for delegating tasks: when the manager can demonstrate that delegation will improve the fund’s management or administration, or when certain set preconditions are met).

Depositaries

The text specifies the oversight and monitoring functions to be discharged by depositaries as well as their depositary duties per se (asset custody or record- -keeping in the case of assets not covered by custody, and the monitoring of cash


Foreign UCITS marketed in Spain

The investment of foreign UCITS marketed in Spain advanced 2.6% in the first quarter then fell back by 5.5% for a first-half decline of 3% (as far as 35.58 billion euros). In straight-number terms, the outflow of assets (1.10 billion euros) equated to a third of the total first-half decline of assets under management in Spanish UCITS. Meantime, the number of schemes being marketed rose from 660 at end- -2010 to 695 in June 2011.

We can perhaps deduce from this setback in the asset share of foreign UCITS that the trend among investors to shift out of riskier Spanish into less risky foreign schemes has attenuated in 2011.

Outlook

The prospects for the domestic collective investment industry remain clouded by uncertainties as investors continue to withdraw on the back of heightened risk aver-sion. Symptomatically, the cash redeemed from fixed-income funds is being divert-ed, in part at least, to perceived safer instruments such as fixed-income guaranteed funds and bank deposits, which have gone on competing strongly for investor funds. Banks’ liquidity needs have led them to offer increasingly attractive deposit rates, and this situation seems likely to persist in the short-term at least. In the sector’s favour are the competitiveness gains harnessed from the numerous fund mergers of recent years and the increased efficiency brought by operating cost containment at fund management companies.

Investment by foreign UCITS

marketed in Spain recedes by 3%

in the first-half period...

...suggesting some attenuation

of their substitute role versus

Spanish UCITS.

Competition from bank deposits

will continue to set the industry

pace.

positions held at third-party entities). Regarding cash monitoring, two options are identified: one which requires the depositary to have a full overview of all movements in these cash accounts, and their reconciliations, and another which only requires it to verify reconciliation procedures. A similar two options are put forward for assets not covered by custody.

The depositary liability regime established in the Directive is filled out in some detail (depositaries to be obliged to replace assets under custody except when they are “lost” as a consequence of an external event beyond the reasonable con-trol of the depositary, the consequences of which were unavoidable despite all reasonable efforts to the contrary), with attention to demarcating internal and external events for the purposes of determining such liability.

Transparency and leverage

Three methods are put forward for calculating leverage: one that measures gross leverage, another based on the commitment method employed by UCITS and a third, advanced method chosen by the manager subject to proof of its greater suit-ability. The text also sets out managers’ periodic reporting requirements with the authorities and investors. Specifically, a quarterly report should be provided to the authorities so ESMA can fulfil its own disclosure obligations on alternative investment funds with the European Systemic Risk Board (ESRB).


4.2 Investment firms

Financial market instability continued to bear down heavily on investment firm business over the first half of 2011, barring the way to a recovery based on core service revenues. The small advance in the sector’s aggregate profits (1.4%) was basically a product of positive extraordinaries and operating cost containment. The sector’s solvency conditions remained sound.

Broker-dealers’ aggregate pre-tax profits amounted to 151 million euros in the first half of 2011, 1.7% more than in the year-ago period. The profits advance had its main origin in extraordinary items, while more recurrent income streams (fees and commissions) continued to thin out against a backdrop of rising costs, particularly depreciation and other charges (see table 17). A sharp jump (over 82%) in corporate income tax liabilities was the other factor that sent net income falling by 8.2% to 121 million euros.

Net fee income dropped by 1% in the first six months to 419 million euros. Fees from order processing and execution fell by 7% to 285 million euros reflecting low-er turnover in equity markets. This item, nonetheless retained its primacy among broker-dealer revenue streams, accounting for almost 70% of fee income in the pe-riod. Fees from investment advisory services managed a creditable advance of 51% to 37 million euros, while portfolio management fees rose by 24% to 7.9 million. Finally, fees from UCITS marketing were down 2.8% year-on-year at 31.3 million euros.

The aggregate gross income of broker-dealers held more or less flat versus end-2010, with a small fall of 0.5% to 362 million euros. This stability resulted from the offset-ting effect of movements under its component captions, with falling fee income and results from financial investments countered by higher net interest income and a substantial fall in exchange losses. Further down the income sheet, net operating income dropped 4.4% to 142.7 million, due to rising operating costs (1.5%) and, above all, heftier charges for depreciation and other provisions.

Brokers managed to grow their pre-tax profits by 7% over the year-ago period to 5.8 million euros. Improvement, as in previous years, was sourced from sharply fall-ing operating costs, which moved down 15% in year-on-year terms to 43 million eu-ros. These cost savings did enough to offset deterioration at the gross income line (a fall of 12% to 50.2 million euros) and permitted a 14% advance in net operating in-come to 5.6 million euros. The fee income contributing most of gross margin sank by over 11% in the reference period, with most investment services sharing in the fall.

Finally, the aggregate profits of portfolio management companies plunged over 50% in the first six months to 677,000 euros, due mainly to the disappearance of one of the sector’s bigger players. This means only six firms remain in the market, two fewer than twelve months back. The approximately 28% fall in aggregate gross margin to 4.3 million euros (six million in 2010) was almost entirely a consequence of falling fee revenues, which are currently confined to portfolio management and financial advisory fees. Both net interest income and the results of financial invest-ments moved up strongly, by 78% and 258% respectively, though their weight in earnings is minor only. Operating expenses fell by 20.4% to 3.6 million euros.

Financial market stress continues

to weigh on investment firm

business.

Broker-dealers grow their

aggregate profits 1.7% in first

half 2011, thanks mainly to

extraordinaries...

...while fee income slips back

further.

Broker-dealer gross margin

holds at 2010 levels.

Broker pre-tax profits advance

7% from January to June on

operating cost containment.

The fall in aggregate earnings

of portfolio management

companies is due to more firms

leaving the market.


In keeping with the year-to-date figures to June 2011, the sector’s pre-tax return on equity14 (ROE) stayed flat versus the year-ago period at 15%. Disaggregating, we find that the 15.4% ROE of broker-dealers was on a par with the year-ago outcome,

14 ROE is calculated as:

ROE = Profit before taxes (annualised)

Equity In which:

Equity = Capital + Share premium + Reserves – Treasury shares + Retained earnings and prior-year prof-

it/loss – dividends and other entitlements.

Sectoral ROE holds at 15%...

Aggregate income statement TABLE 17

Broker-dealers Brokers Portfolio managers

Thousand euros Jun 10 Jun 11 % var. Jun 10 Jun 11 % var. Jun 10 Jun 11 % var.

1. Net interest income 43,915 52,973 20.6 732 1,144 56.2 165 293 77.7

2. Net fee income 279,871 275,520 -1.6 56,876 50,423 -11.4 5,967 3,840 -35.6

2.1. Fee income 423,657 419,375 -1.0 65,412 57,899 -11.5 11,440 9,123 -20.3

2.1.1. Order processing and execution 306,583 285,047 -7.0 21,791 19,345 -11.2 – – –

2.1.2. Distribution and underwriting 2,906 2,830 -2.6 610 1,181 93.5 – – –

2.1.3. Securities custody and administration 11,218 10,887 -3.0 186 191 2.5 – – –

2.1.4. Portfolio management 6,366 7,911 24.3 8,808 6,760 -23.3 9,218 8,323 -9.7

2.1.5. Design and advising 24,477 37,047 51.4 1,291 2,634 104.1 719 800 11.2

2.1.6. Search and placement 7 184 2,722.1 115 538 367.8 – – –

2.1.7. Margin trading 5 4 -15.2 10 13 30.5 – – –

2.1.8. UCITS marketing 32,261 31,359 -2.8 12,004 11,097 -7.6 26 0 -100.0

2.1.9. Others 39,834 44,104 10.7 20,596 16,141 -21.6 1,477 0 -100.0

2.2. Fee expense 143,785 143,855 0.1 8,536 7,476 -12.4 5,473 5,283 -3.5

3. Result of financial investments 76,990 38,782 -49.6 -104 -54 48.1 65 233 257.6

4. Net exchange income -38,210 -5,344 86.0 278 -225 – 16 -14 -189.1

5. Other operating income and expense 1,437 171 -88.1 -654 -1,081 -65.3 -173 -5 97.1

GROSS INCOME 364,004 362,102 -0.5 57,128 50,207 -12.1 6,040 4,347 -28.0

6. Operating expenses 209,760 212,791 1.5 50,836 43,433 -14.6 4,543 3,616 -20.4

7. Depreciation and other charges 1,776 6,538 268.2 1,430 1,209 -15.4 86 54 -37.2

8. Impairment losses 3,159 -1 – -32 -3 90.7 0 0 –

NET OPERATING INCOME 149,310 142,774 -4.4 4,894 5,568 13.8 1,411 677 -52.0

9. Other profit and loss -929 8,100 - 551 275 -50.1 -6 0 100.0

PROFITS BEFORE TAXES 148,381 150,874 1.7 5,445 5,843 7.3 1,405 677 -51.8

10. Corporate income tax 16,200 29,472 81.9 1,003 554 -44.8 234 187 -20.2

PROFITS FROM ONGOING ACTIVITIES 132,181 121,402 -8.2 4,443 5,289 19.1 1,170 490 -58.1

11. Profits from discontinued activities 0 0 – 0 0 – 0 0 –

NET PROFIT FOR THE YEAR 132,181 121,402 -8.2 4,443 5,289 19.1 1,170 490 -58.1

Source: CNMV.


while brokers grew their ratio from last year’s 9% to 10.7% in 2011. Portfolio man-agement companies traced the opposite course with ROE down from 7.2% to 4.2%.

A look at the change factors15 for ROE in broker-dealers and broker contingents compared to 2009 and 2010 shows that the same forces were operating but with a rather different intensity. As we can see from figure 19 (right-hand panel), ROE held stable over first-half 2011 because the positive contribution of asset productivity balanced out the negative impact of lower leverage, while remaining components performed broadly as before.

Pre-tax ROE of investment firms FIGURE 19

ROE (%) Contribution to annual change (pp)

0

10

20

3040

50

60

70

80

Broker-dealers

Brokers

Portfolio management companies

-1.0-0.8-0.6-0.4-0.20.00.20.40.60.8

LeverageAsset productivityEfficiencyProvisions and other

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

-Q2

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

-Q2

Source: CNMV.

As figure 20 shows, the number of firms reporting losses rose from 23 at end-2010 to 30 in mid-June 2011 (13 broker-dealers, 16 brokers and 1 portfolio management company). Comparing with June 2010, we find that of the 34 entities then in losses (15 broker-dealers, 16 brokers and 3 portfolio managers), 21 were in the same situa-tion one year later (9 broker-dealers, 11 brokers and 1 portfolio management com-pany). Despite the higher number of loss-making entities, the amount of their losses was 26% lower at 9 million euros.

Sector firms remained comfortably compliant with capital standards in the first half of 2011, hinting at a pain-free adaptation to the stricter requirements imposed under the 2009 solvency rules. As we can see from figure 21, the own funds of broker-dealers were 3.9 times above the minimum requirement at mid-year 2011

15 The following equation allows us to isolate the eff ects of changes in each factor contributing to invest-The following equation allows us to isolate the effects of changes in each factor contributing to invest-

ment firm ROE:

ROE = PBT

Equity= PBT

Net operating inc.(1)× Net operating inc.

Gross income(2)× Gross income

Assets(3)× Assets

Equity(4)

in which the numbered elements serve as indicators of: (1) extraordinary items in the income statement,

(2) efficiency, (3) asset productivity and (4) leverage. For a fuller description of how to interpret the ele-

ments in this equation, see the exhibit “ROE breakdown” in Securities markets and their agents: situation

and outlook in the CNMV Bulletin for first quarter 2008.

...with gains from asset

productivity wiped out by lower

leverage.

Smaller losses at a larger number

of firms...

...while the sector remains

comfortably in line with capital

requirements.


(3.7 times in June 2010), similar to the levels reported before the new regime came into force. Brokers too increased their surplus to two times the minimum (1.8 times in June 2010), albeit without matching the levels of broker-dealers. The contrast was marked by the portfolio management companies, whose own funds edged down slightly in first-half 2011 to just above the minimum standard. At the first half close, as in mid-2010, no single entity had an own funds deficit.

Number of investment firms in losses FIGURE 20

0

5

10

15

20

25

30

35

40

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011-Q2

Source: CNMV.

Investment firm capital adequacy FIGURE 21

(surplus of qualifying equity to the minimum requirement, %)

0

100

200

300

400

500

600

700

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011-Q2

Broker-dealers Brokers Portfolio management companies

Source: CNMV.

Investment advisory firms (IAFs), whose activity is legally confined to dispensing investment advice and guidance, have been operating in Spain since 2009 and the transposition of the Directive on Markets in Financial Instruments (MiFID). By mid- -2011 a total of 64 such firms were registered with the CNMV (see table 18), twelve more than at end-2010 and double the number of twelve months before. Sector ex-pansion is apparent in both the growing number of contracts signed (3,278 in June 2011 against 2,430 in December) and the volume of assets under advice, which advanced 5.2% in the first-half period to 17 billion euros. Professional clients account-

Investment advisory firms

continue their push.


ed for 3.3% of contracts signed but 87% of assets advised (an average 136 million euros compared to the 700,000 per contract of retail customers). Finally, the fees earned by IAFs stood at over 14 million euros against the 7.7 million of first-half 2010.

The small improvement in investment firms’ earnings has already been remarked upon in previous reports. Unfortunately recovery is for the moment no more than tentative and insufficiently supported on core business growth. Given the renewed downturn in financial market turnover, the prolonged drought in primary market issuance and the fragile state of the collective investment industry, providers have increasingly turned their attention to other business lines, like investment advice or portfolio management, which nonetheless bring in only a small part of their total income. So although the sector is adequately capitalised and firms are doing what they can to strengthen income statements through operating cost containment, at brokers especially, or the reduction of financial leverage, the fact is that unless finan-cial markets conditions normalise and more headway is made in sector restructur-ing, the outlook is none too favourable. That said, we are unlikely to see a repeat of the profits slump experienced in the first throes of the crisis.

Main investment advisory firm variables TABLE 18

2009 2010 2011

Million euros 2009 2010 2Q 1Q 2Q 1Q

NO. OF ENTITIES 16 52 16 36 52 64

ASSETS UNDER ADVICE1 1,411 16,122 1,411 11,930 16,122 16,968

1. Retail customers 364 1,709 364 1,164 1,709 2,091

2. Professional customers 1,047 14,321 1,047 10,746 14,321 14,787

3. Others 0 92 0 19 92 91

NO. OF CONTRACTS 317 2,430 317 1,789 2,430 3,278

1. Retail customers 293 2,343 293 1,732 2,343 3,161

2. Professional customers 24 80 24 53 80 109

3. Others 0 7 0 4 7 8

1 Data at period end. Periodicity of six months.

4.3 UCITS management companies

The managed assets of UCITS management companies fell by 1.2% to 175.5 billion euros in the first half of 2011. The was much less severe a decline than in previous years16 – just two billion euros in absolute terms – but still meant industry volumes stayed stuck at the level of the late 1990s (see figure 22 and table 19).

This decline in managed assets was reflected in a 3.8% slide in UCITS managers’ first- -half profits as far as 282 million euros.17 Management fees too receded slightly to 0.87% of assets in June 2011 (see table 19), while aggregate return on equity held more

16 The steepest fall since the onset of crisis was in 2008, when the industry lost over 87 billion euros with

respect to 2007.

17 Annualised profits.

Although sector earnings have

risen slightly, recovery drivers

remain weak.

Assets under management in

UCITS management companies

drop by 1.2% in the year’s first

half...

...translating as a 3.8% fall in the

sector’s aggregate earnings.


or less flat at around 20%. Finally, although the number of loss-making companies was up to 35, one more than in December 2010, their combined losses fell to around half (ten million euros in annual terms), repeating the pattern of the previous year.

UCITS management companies: assets under management and FIGURE 22

pre-tax profits

0

50

100

150

200

250

300

350

dec-01 dec-02 dec-03 dec-04 dec-05 dec-06 dec-07 dec-08 dec-09 dec-10 jun-110

100

200

300

400

500

600

700

800

900

Assets (left-hand scale) Earnings (right-hand scale)

Billion euros Million euros

Source: CNMV. The profits figure to June 2011 has been restated on an annual basis.

In the first half of 2011, UCITS management companies pressed on with the task of streamlining their investment fund offerings by means of multiple inter-product mergers. At the same time, financial sector restructuring has meant the reorganisa-tion of certain companies. Indeed of the five managers that ceased operation in the first half of 2011, three did so as the result of the wider restructuring process.

UCITS management companies: assets under management, TABLE 19

management fees and fee ratio

Million euros

Assets undermanagement

UCITS management fee income2

Average UCITS management fee (%) Fee ratio (%)1

2002 192,099 2,259 1.18 72.7

2003 231,458 2,304 1.00 73.8

2004 262,132 2,670 1.02 73.6

2005 293,973 2,976 1.01 72.2

2006 308,476 3,281 1.06 71.5

2007 295,922 3,194 1.08 70.5

2008 209,014 2,302 1.10 70.8

2009 203,379 1,702 0.84 68.6

2010 177,676 1,622 0.91 68.1

2011 (June²) 175,458 1,532 0.87 67.0

Source: CNMV.

1 Ratio of fee expenses for fund marketing to fee income from UCITS management.

2 Data for fee income and average management fees are restated on an annual basis.

The impact of financial sector

restructuring is making itself felt.


4.4 Other intermediaries: venture capital

The register of venture capital entities (VCEs) has recorded 13 new entrants and 10 retirals since year-end 2010. The number of venture capital funds and venture capi-tal management companies in operation rose by three and four in net terms in the first three quarters of 2011, taking their respective totals to 111 and 79. Conversely, the number of venture capital companies dropped from 150 at end-2010 to 146 in September 2011 after a run of retirals (nine).

Movements in the VCE register in 2011 TABLE 20

Situation at 31/12/2010 Entries Retirals

Situation at 20/09/2011

Entities 333 13 10 336

Venture capital funds 108 4 1 111

Venture capital companies 150 5 9 146

Venture capital management companies 75 4 0 79

Source: CNMV.

The annual statistics kept at the CNMV put the end-2010 assets of venture capital funds at a total of 3.75 billion euros, an 18.2% increase with respect to 2009 (see table 21). A breakdown of assets by holder shows that institutional investors were again the majority force. In all, legal entities commanded a 95% share of total fund assets in 2010, practically the same proportion as in 2009 (95.6%), while the share corresponding to individuals fell to 5%. Savings banks and non-financial corporations maintained significant positions, with around 15% each of the fund assets held by legal persons, ahead of public authorities (13%), pension funds (11%) and foreign entities. Proportionally, investor holdings varied little between 2009 and 2010.

The share capital of venture capital companies came to 3.95 billion euros at the 2010 close, 4.2% less than at end-2009. Ownership was more tightly concentrated than in the venture capital fund segment. Specifically, non-financial corporations were the largest holders with 38.4% of capital at the 2010 close compared to 34.8% in 2009, ahead of the savings banks with 23.5% (19.9% in 2009), other financial companies with 16.6% (17.4% in 2009) and, finally, the banks, with 10.2%. Note that this last group withdrew significantly from capital in 2010 in both absolute and relative terms.

According to data furnished by the Asociación Española de Entidades de Capital Riesgo (ASCRI) for the first half of 2011, the sector is experiencing something of an upturn. Venture capital firms invested 1.93 billion euros over the first six months of the year, comparable to the pre-crisis levels of first-half 2007 and 66% more than in first-half 2010. International funds were again prime movers in the period, with pan-European investment accounting for 65% of the total. Sixty per cent of all trans-actions, whose numbers (387) varied little with respect to 2010, corresponded to expansion capital, 34% to venture capital and 4% to leveraged operations. The sec-tors receiving most of this investment were medicine and health (24%), other serv-ices (23%), industrial products and services (17%) and consumer goods (14%).

Venture capital funds expand

their assets 18% in 2010...

...while the share capital of

venture capital firms shrinks by

4.2%.


Venture capital entities: assets by type of investor TABLE 21

Venture capital funds Venture capital companies

Million euros 2009 2010 2009 2010

Natural persons

Residents 139.34 183.89 79.07 81.81

Non-residents 1.80 2.54 0.39 0.59

Legal persons

Banks 207.38 226.40 551.92 402.42

Savings banks 490.57 547.46 819.37 929.81

Pension funds 357.41 413.29 25.23 10.35

Insurance undertakings 77.39 95.02 15.83 16.20

Broker-dealers and brokers 0.00 0.00 0.89 0.00

Collective investment schemes 22.39 26.02 8.20 8.28

Domestic venture capital entities 49.46 68.46 64.39 25.42

Foreign venture capital entities 247.67 296.70 50.53 44.87

Public authorities 372.65 494.53 132.44 133.80

Sovereign funds 26.02 33.17 0.00 0.00

Other financial companies 263.84 292.51 717.45 657.82

Non-financial companies 460.91 538.34 1,436.89 1,520.16

Foreign entities 347.26 395.53 36.34 44.45

Others 108.15 137.22 187.13 78.46

TOTAL 3,172.24 3,751.08 4,126.07 3,954.44

Source: CNMV.

The latest news on the sector hints at a return to a more dynamic market. But de-spite a sturdy advance in sector investment over these past months and the tenta-tive resumption of large-scale transactions, persistent difficulties of access to bank finance are hampering what could and should be a stronger recovery.

...but bank lending constraints

continue to hamper recovery.

II Reports and Analyses

Return on Spanish investment funds: an analysis of its determinants

Mª Isabel Cambón Murcia (*)

(*) Mª Isabel Cambón Murcia is a member of the Studies, Statistics and Publications Department of the

CNMV. This article is based on Working Document No. 48 of the CNMV, written by the same author and

with the same title.


1 Introduction

The investment fund (IF) industry plays an important role within the financial sys-tem, since it makes it possible to channel the savings of different kinds of investors towards financial instruments of various markets and to access professional man-agement. There is a recurring debate, the subject of many academic papers, regard-ing the capacity of this sector to generate above-market returns to its customers. A significant part of this literature attempting to evaluate the return on investment funds has used some type of market reference, either to make a direct comparison with the return on funds, or to construct some kind of performance metric from which to draw conclusions. The evidence found by these works at both an interna-tional and a domestic level has been indicative insofar as investment funds (espe-cially equity income funds) do not seem to be able to better the performance of the chosen market.1 However, notwithstanding these results, the truth is that the indus-try has experienced a period of great expansion both at home and abroad in recent decades, which would be hard to understand if the returns on these funds were not, in general, reasonable (see figure 1). This apparent paradox has given rise to a great many works which have looked into the factors explaining the return on investment funds and have identified certain investment-related behaviours which are not sole-ly driven by considerations of return/risk in a strict sense.

The analysis presented in this article takes the above mentioned paradox as its start-ing point, but rather than compare the return on Spanish investment funds against any benchmark, this paper attempts to explain the return on those funds on the basis of a number of variables which are important to investment institutions, such as volatility, past returns, fees charged, the size of the fund or of the fund manager, the orientation of the fund, the age, etc. The empirical model used enables some of

1 See Sharpe (1996), “Mutual fund performance”, in Journal of Business, 39, pp. 119-138; Jensen (1968),

“The performance of mutual funds in the period 1945-1964”, in Journal of Finance, 23, No. 2, pp. 389-416;

and Grinblatt and Titman (1989), “Performance measurement without benchmarks: An examination of

mutual fund returns”, in Journal of Business, 66, pp. 47-68; or, more recently, Malkiel (1995), “Returns from

investing in equity mutual funds 1971-1991”, in Jour nal of Finance, 50, pp. 549-572; Detzler (1999), “The

performance of global bond mutual funds”, in Journal of Banking and Finance, 23, pp. 1195-1217; and

Edelen (1999), “Investor flows and the assessed performance of open-end mu tual funds”, in Journal of

Financial Economics, 53, pp. 439-466. On the domestic front, we would highlight the papers of Ferrando

and Lassala (1998), “Evaluación de la gestión de los FIAMM y de los FIM de renta fija en España en el

periodo 1993-1995”, in Revista Española de Financia ción y Contabilidad, 94, pp. 197-231; Basarrate and

Rubio (1999), “Non-simultaneous prices and the evaluation of ma nagement portfolios in Spain”, in Ap-

plied Financial Economics, 9, pp. 273-281; Martínez (2001), “El puzzle de los fondos de inversión en Es-

paña: un enfoque de demanda”, in Moneda y Crédito, 213, pp. 129-154; Fernández et al. (2007), Rentabili-

dad de los fondos de inversión de renta variable nacional en España 1991-2006; and Palacios (2010), A

vueltas con los fondos de inversión españoles: nuevas sorpresas en la década 2000-2009, IESE, Research

Document DI-849.

70 Reports and Analyses. Return on Spanish investment funds: an analysis of its determinants

the more recurrent hypotheses in previous literature (for example, persistence of return, or the relationship between return and the fees charged), and others of a relatively novel nature, such as the relationship between the return on the fund and its retail or institutional focus, among others, to be compared.

The article is structured in the following manner. The second section describes the data sample used in the study and the model to be estimated. The third section presents the results of the estimation for both investment funds as a whole and for the different segments of funds. Finally, in the fourth section the main conclusions are presented.

Assets of the investment fund industry FIGURE 1

Level (% GDP) Annual change, %

0

10

20

30

40

50

60

70

80

90

1940

1960

1972

1976

1980

1984

1988

1992

1996

2000

2004

2008

-40

-20

0

20

40

60

80

100

1940

1955

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

USA

Annual average: 16.8%

0

5

10

15

20

25

30

35

1961

1965

1969

1973

1977

1981

1985

1989

1993

1997

2003

1963

1967

1971

1975

1979

1983

1987

1991

1995

2001

2005

2009

2007

1961

1965

1969

1973

1977

1981

1985

1989

1993

1997

2003

1963

1967

1971

1975

1979

1983

1987

1991

1995

2001

2005

2009

2007

-40

-60

-20

0

20

40

60

80

100

United Kingdom


0

5

10

15

20

25

30

35

40

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

-40

-20

0

20

40

60

80

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

Spain


Source: 2010 Investment Company Fact Book (USA), Investment Management Association (United Kingdom),

CNMV (Spain) and Thomson Datastream.


2 Data and methodology

In the last decade, 2000-2009, the aggregate annual return in net terms (i.e. exclud-ing expenses) of Spanish investment funds as a whole has ranged from -4.2% to 5.7% (see table 1). There are substantial differences between the returns of the various categories of funds as a result of the different degree of risk assumed by each one. Fixed income funds have shown a more stable return, ranging from 1.5% to 3.7%. Conversely, returns on equity funds suffered from truly significant fluctua-tions in the last decade, with years in which losses were close to 40%, at the critical moments of the crisis, or gains were over 30%, depending on the state of the stock market at the time. Returns on mixed funds (fixed income and equity) are some-where in the middle, depending on the relative importance of the investments made in fixed income or equity securities. Finally, the return on guaranteed funds, de-pending on their composition, has ranged from 0.8% to 4.5% in the fixed income category and from -2.6 to 4.7% in the equity income category.

Annual return on investment funds (%) TABLE 1

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Total1 -1.9 -1.6 -3.6 4.2 3.4 5.0 5.6 2.7 -4.2 5.7

Fixed income2 3.3 3.7 2.7 1.8 1.7 1.5 2.0 2.7 2.1 1.9

Mixed fixed income3 -0.1 -1.0 -3.6 3.7 3.8 5.0 4.2 1.9 -7.1 6.9

Mixed equity income4 -6.9 -7.3 -17.0 10.1 6.2 11.9 10.3 2.7 -22.2 16.5

Euro equity income5 -11.0 -13.8 -30.1 23.8 15.3 21.4 27.3 6.1 -39.8 32.4

International equity income6 -15.8 -20.6 -33.2 12.8 7.0 25.6 13.4 1.5 -41.7 37.3

Guar. fixed income 3.8 4.4 4.5 2.4 2.6 1.7 0.8 2.8 3.3 3.8

Guar. equity income7 -1.2 0.1 1.1 3.3 4.1 4.0 4.7 2.4 -2.6 3.6

Global funds -6.1 -11.8 -12.7 4.8 2.2 6.2 4.1 1.5 -8.6 10.9

For comparison purposes:8

Ibex 35 -21.7 -7.8 -28.1 28.2 17.4 18.2 31.8 7.3 -39.4 29.8

Eurostoxx 50 -2.7 -20.2 -37.3 15.7 6.9 21.3 15.1 6.8 -44.4 21.1

Treasury Bills (1-3 m) 4.7 3.1 2.7 2.0 2.0 2.5 3.5 3.9 1.8 0.4

Treasury Bills (12 m) 4.5 3.2 2.6 2.2 2.2 2.8 3.8 4.1 1.9 0.9

Govt. Debt (10 y) 5.2 5.1 4.3 4.3 3.6 3.3 4.0 4.4 3.9 4.0

Private fixed income (12 m) 4.8 3.4 2.9 2.4 2.5 3.0 4.1 4.8 3.3 1.4

Source: Thomson Datastream, Bank of Spain and CNMV.

1 Neither passive management funds nor absolute return funds, created in 2009, are included, since not

even one full year of data is available.

2 Up to 1Q09 includes: short-term fixed income, long-term fixed income, international fixed income,

monetary funds and FIAMM (the latter until 2006). Since 2Q09 includes: Euro fixed income, international

fixed income and monetary funds.

3 Up to 1Q09 includes: mixed fixed income and mixed international fixed income. Since 2Q09 includes:

mixed Euro fixed income and mixed international fixed income.

4 Up to 1Q09 includes: mixed equity income and mixed international equity income. Since 2Q09 includes:

mixed Euro equity income and mixed international equity income.

5 Up to 1Q09 includes: domestic equity income and Euro equity income. Since 2Q09 includes Euro equity

income (which already includes domestic equity income).

6 Up to 1Q09 includes: international equity income Europe, international equity income Japan, international

equity income USA, international equity income emergings, and international equity income others.

Since 2Q09: international equity.

7 Up to 1Q09: guaranteed equity income. Since 2Q09: guaranteed and partially guaranteed equity income.

8 The annual rate of change of the equity indices (Ibex 35 and Euro Stoxx 50) are provided as are the interest

rates as at 31 December of each year for fixed income instruments.


2.1 Data

The analysis presented below has been made on the basis of information that collec-tive investment schemes (CIS) managers send regularly to the CNMV. We have taken annual data from the investment funds in existence between 2000 and 20092 for which we have a minimum of five years of observations. Fund merger processes and changes of focuses during the period under study are also incorporated into the study. Given the large number of focuses present in the investment fund industry, we decided to group them into the following categories: fixed income, mixed fixed income, mixed equity income, Euro equity income, international equity income, and global funds.3

The representativity of the final sample used by the study in terms of assets is high. As we can see in figure 2, the assets of the funds included in the sample represent around 84% of the total assets of the funds in average terms for the ten year period under study. Representativity is high in all fund categories, with assets representing between 85% and 89% of the total, save for the case of global funds where the per-centage falls to 65% due to the relative youth of this category of funds.

Representativity of the sample in terms of assets1 (%) FIGURE 2

0

10

20

30

40

50

60

70

80

90

100

%

Total RF RFM RVM RVE RVI GL

Source: CNMV.

1. Assets of the sample as a percentage of the total assets of the funds or of each category.

RF: fixed income, RFM: mixed fixed income, RVM: mixed equity income, RVE: Euro equity income, RVI:

international equity income and GL: global funds.

2.2 Description of the empirical model

An empirical linear regression model was established4 in which the dependent vari-able is the net annual return on the fund, y

t, which is defined as the percentage

2 Except for guaranteed funds.

3 For a detailed description of the various focuses, see M.I. Cambón (2011), Spanish mutual fund perform-

ance: an analysis of the determinants, CNMV Working Paper Series, No. 48 (also in Spanish).

4 See Cambón (2011), op. cit.


variation of the net asset value of the unit between the close of one year and the close of the year before. The following were chosen as explanatory variables.

– Volatility (VOLt), defined as the annualised typical deviation of the monthly

yields of the fund in the previous twelve months.

– Net subscriptions (SNt), defined as the quotient between the net flows of in-

vestment in the funds (net subscriptions for positive values and net redemp-tions for negative values) during the period under study and the assets of the fund at the beginning of that period.

– Explicit and implicit fees. We consider the two types of fees charged to invest-ment funds: implicit fees (CGD

t), which comprise management fees (on assets

or results) and custody fees, and the explicit fees, which are the subscription and redemption fees (CSR

t).

– Age of the fund (EDADt): number of years the fund has existed.

– Size of the fund (PATFt): assets of the fund at the close of each year.

– Market share of the fund manager (CUOTAGt): assets managed by the fund

manager as a percentage of the total assets of the industry.

– Percentage of the assets of the fund in the hands of institutional investors (INSTIT_PATRIM

t): this variable aims to identify the focus of an investment

fund with regard to the type of target client.

– Type of group to which the fund manager belongs, whether it belongs to a bank (BANCO

t), a savings bank (CAJA

t), or an independent financial group.

– Changes experienced by the investment funds during the period in question: mergers (FUSIÓN

t) and changes of investment focus (CAMBIOVOC

t).

The panels of figure 3 set out the averages of the most important variables. First of all it is important to note that the mean annual return on the funds in the sample in the reference period 2000-2009 is 1.3%. Pure and mixed fixed income funds, to-gether with global funds beat this average. The turbulences in financial markets in the early years of the decade and at the end of it due to the financial crisis reduced the return on the riskier funds to extremely low figures, and even reached negative figures in the case of international equity income funds (-0.9%).

The average volatility of the return on the funds in the sample during the decade was 6.8%. The riskier funds showed a higher volatility (with a maximum of 12.2%), while the more conservative funds showed an average volatility of 2.7%.

For funds as a whole, average net annual subscriptions were negative during the decade. Market turbulences and competition from other financial instruments, such as high yield bank deposits, gave rise to a substantial volume of redemptions during this period. By investment focus we see that the highest relative volume of redemp-tions corresponds to global funds, a result which may be influenced by the sample’s


smaller size due, in turn, to its relative youth. If we exclude this focus, we can see that the largest net redemptions in relative terms were in the fixed income catego-ries.

The average custody and management fees of the funds amounted to 1.45%. All the equity income funds topped this average, with a maximum of 1.9% for interna-tional equity income funds, while the lowest management and custody fees were charged by pure fixed income funds, at 1.1%. The average subscription and redemp-tion fees amount to 0.27%. Once again, the average is higher for equity income funds and lower for fixed income funds.

Averages of some variables of the sample FIGURE 3

-2

0

2

4

6

8

10

12

14


Yield Volatility

0

10

20

30

40

50


Banks Savings banks

0,00

0,25

0,50

0,75

1,00

1,25

1,50

1,75

2,00

%

% %

%

Total RFM RF RVM RVE RVI GL

Management and custody fees Subscription and redemption fees

0

10

20

30

Total

40

RF RFM RVM RVE RVI GL

Management company’s market share Institutional presence

Return and volatility Fund manager’s financial group

FeesFund manager’s market share and institutional

presence

Source: CNMV.

RF: fixed income, RFM: mixed fixed income, RVM: mixed equity income, RVE: Euro equity income, RVI:

international equity income and GL: global funds.

With regard to the age of funds, on average the age of fixed income funds tends to be higher than equity income funds and global funds. The size of fixed income funds is also higher on average than equity income funds, except for Euro equity income where the domestic funds raise the average. The fund manager market share variable shows that the larger fund managers are more active in pure fixed income funds, pure equity income funds, and global equity funds.

32% of the assets of the funds in the sample are in the hands of institutional inves-tors. In this case, the equity income categories show a higher percentage of institu-


tional participation (nearly 38% in the case of international equity income funds),

while for fixed income funds the average is under 30%.

With regard to which financial group the fund manager belongs to, it should be

noted that 41% of the observations of the sample correspond to funds belonging to

banks and nearly 36% to funds belonging to savings banks. The percentage of bank

managed funds in each focus is more evenly distributed, while savings banks con-

centrate more on pure fixed income funds and pure equity income funds, with a

much smaller share in global funds.

The percentage of funds which have undergone one or more merger processes in

the period under study is 27% for the sample as a whole. By focus, the relative im-

portance of mergers was greater for mixed fixed income funds and international

equity income funds. Finally, between 2000 and 2009 a little over 19% of the funds

underwent some change in focus while remaining within one of the six classifica-

tions considered in this work.

3 Results

We go on to describe the main results of the estimation of the regression equation

in which the dependent variable is the net annual return on the fund and the ex-

planatory variables are those defined in point 2.2.5 First of all the results for the in-

dustry as a whole are presented along with an initial comparison between the pure

and mixed equity income and fixed income categories and between those and global

funds (point 3.1), while in point 3.2, we do not take into account whether the funds

are pure or mixed but rather their geographical focus (domestic or international).

3.1 Results for the industry as a whole and comparison between pure and mixed funds

In table 2 we present two estimations for investment funds as a whole, which differ

only in the way the variable related to the fund manager’s market share is pre-

sented. The first (reduced estimation) includes the variable as defined in point 2.2,

while the second (broad estimation) makes a distinction between the type of group

the fund manager belongs to (bank, savings bank or independent entity). Next we

present the most interesting results of these estimations together with the results

obtained for the categories of funds depending on whether they are pure or mixed

(see table 3).

5 The estimation was made using the generalised method of moments (GMM) applied to panel data, fol-The estimation was made using the generalised method of moments (GMM) applied to panel data, fol-

lowing the methodology proposed by M. Arellano and S.R. Bond (1991), “Some tests of specification for

panel data: Monte Carlo evidence and an application to employment equations”, in Review of Economic

Studies, 58, pp. 277-297; M. Arellano and O. Bover (1995), “Another look at the instrumental-variable es-

timation of error-component models”, in Journal of Econometrics, 68, pp. 29-52; and D. Holtz-Eakin, W.

Newey and H.S. Rosen (1998), “Estimating Vector Autoregressions with Panel Data”, in Econometrica, 56,

pp. 1371-1396.


Persistence. No evidence was found of persistence in the return on investment funds as a whole for either of the two specifications considered, neither was evidence found for any of the categories of funds considered. The majority of studies of Span-ish investment funds detect a certain persistence in returns in the short term, espe-cially in the case of equity income funds and extreme funds.6 If persistence is only detected under these conditions, it would seem reasonable for the coefficient related to persistence of return in our model for the universe of investment funds in the decade to be insignificant.

Volatility. Neither does the model find any positive and statistically significant effect of past volatility on the present return on the fund. However, the fact that in the course of the decade there have been several periods of turbulence of varying nature which have substantially impaired the performance of the riskier investment funds may be influencing the relationship observed between the two variables. For the funds as a whole, the relationship might possibly be more obvious if we looked at a sufficiently long period of time. By category, this positive relationship is detected in fixed income funds and in international equity income funds.

Net relative subscriptions. The rejection of the positive effect does not lend support to the smart money theory, whereby investors would demonstrate a certain skill in choosing investment funds. According to this theory, the funds which receive the highest volume of subscriptions in a given period of time tend to show a higher re-turn in the following period.7 Some authors which have obtained this same result in other studies referring to the domestic fund market8 put it down to the tax treat-ment of the capital gains of the funds (something which changed in 2003 but does

6 See S. Menéndez and S. Álvarez (2000), “La rentabilidad y la persistencia de los resultados de los fondos

de inversión de renta variable”, in Revista Española de Financiación y Contabilidad, 103, pp. 15-36; J.C.

Matallín and M.A. Fernández (2001), “La evaluación de los FIM de renta variable: un enfoque endógeno

y multiperiodo”, in Revista Española de Financiación y Contabilidad, 30 (107), pp. 67-102; L. Ferruz et al.

(2003), “Analysis of performance persistence in Spanish Short Term Fixed Interest Investment Funds

(1994-2002)”, in European Review of Economics and Finance, 2 (3), pp. 1-75; A. Ciriaco and R. Santamaría

(2005), “Persistencia de resultados en los fondos de inversión españoles”, in Investigaciones Económicas,

vol. XXIX (3), pp. 525-573; I. Toledo and R. Marco (2006), “¿Persisten las rentabilidades en el mercado de

fondos de inversión español? Un análisis empírico para el periodo 1994-2001”, in Estadística Española,

vol. 48, No. 161, pp. 5-38; L. Ferruz et al. (2007), “Análisis de la persistencia en rentabilidad de los FIAMM

y de los determinantes de sus comisiones”, in Revista española de financiación y contabilidad, vol. XXXVI,

No. 136, pp. 689-706; M. Ruiz (2007), Los fondos de inversión: performance y persistencia, Working Docu-

mento No. 26 of the CNMV; and R. Marco (2007), “Rentabilidad y crecimiento patrimonial en el mercado

de fondos de inversión”, in Revista de Economía Aplicada, No. 44 (vol. XV), pp. 41-84. At an international

level, we would highlight the following papers: M. Grinblatt and S. Titman (1989), “Mutual fund perfor-

mance: An analysis of quarterly portfolio holdings”, in Journal of Business, 62, pp. 393-416; B. Malkiel

(1995), “Returns from investing in equity mutual funds 1971-1991”, in Journal of Finance, 50, pp. 549-572;

S. Brown and W. Goetzman (1995), “Performance persistence”, in Journal of Finance, 50, pp. 679-698; M.

Carhart, J. Carpenter, A. Lynch and D. Musto (2000), “Mutual fund survivorship”, in Review of Financial

Studies, 15, pp. 1439-1463; and W.G. Droms and D.A. Walker (2001), “Determinants of variation in mutual

fund returns”, in Applied Financial Economics, 5, pp. 383-389.

7 The most important papers at an international level which touch upon the skill of investors when cho-

osing funds are those of M.J. Gruber (1996), “Another puzzle, the growth in actively managed mutual

funds”, in Journal of Finance, 51, (3), pp. 783-810 and L. Zheng (1999), “Is money smart?: A study of mu-

tual fund investors´ fund selection ability”, in Journal of Finance, 54 (3), pp. 901-933.

8 A. Ciriaco, C. Del Río and R. Santamaría (2002), “El inversor ante la elección de fondos de inversión. Algunos

datos para la reflexión”, in Papeles de Economía Española, No. 94, pp. 122-133 and Marco (2007), op. cit.


Estimation of the equation of the determinants of the return TABLE 2

for the funds as a whole

Reduced estimation1

Broad estimation1

Return (t-1) 0.009(0.941)

0.012(0.929)

Volatility (t-1) -0.488(0.404)

-0.350(0.585)

Net subscriptions (t-1) 0.010(0.945)

0.088(0.479)

Management and custody fees (t) -0.137(0.822)

0.029(0.963)

Subscription and redemption fees (t) 2.112***(0.004)

2.220***(0.003)

Age of the fund (t) -0.007(0.910)

0.036(0.520)

Assets of the fund (t) -0.019(0.906)

-0.068(0.418)

Market share of the fund manager (t) -0.149**(0.023)

Market share of the fund manager (t) (BANCO) -0.179**(0.015)

Market share of the fund manager (t) (CAJA) -0.099(0.352)

Market share of the fund manager (t) (INDEP) 3.214**(0.037)

Percentage of assets in the hands of institutional investors (t) -0.413**(0.029)

-0.362*(0.066)

BANCO 7.851***(0.000)

7.371***(0.001)

CAJA 4.013***(0.001)

4.817***(0.005)

FUSIÓN -0.180(0.894)

0.083(0.957)

CAMBIOVOC -0.429(0.542)

-0.260(0.698)

Hypothesis tests

m1 -2.19(0.028)

-2.04(0.042)

m2 -1.88(0.060)

-1.66(0.097)

Sargan 35.33(0.105)

35.76(0.121)

1 GMM estimation in orthogonal deviations that are robust to heteroscedasticity and serial correlation. As

instrumental variables we use lags up to t-2 of the variable, net subscriptions and volatility variables.

Estimated coefficients and p-value of the statistic t in parentheses. *. 10% significance level. **. 5%

significance level. ***. 1% significance level.

m1 and m2 correspond to tests on the first- and second-order serial correlations, respectively, on first

difference errors. The p-value is provided.

Sargan is a test which checks the validity of the instruments used. The p-value is provided. The null hypothesis

tested is “the set of instruments used is valid”, therefore a sufficiently high p-value (for example, over 0.05)

would not reject the validity of the instruments.


not appear to have had a significant effect in this respect), high redemption fees, and the high level of concentration of the fund marketing channel, factors which may limit the mobility of participants between funds. By category, we can only see a significant and positive relationship between net subscriptions and the return on the funds in the mixed fixed income category.

Fees. In theory, the fact that one investment fund charges higher fees (mainly man-agement fees) than another fund with a similar risk would be justified by the great-er skill of the managers of the first fund, which ultimately would be reflected in a higher return (adjusted for risk). Generally speaking, this expected positive relation-ship between return and fees finds no empirical support in the most important studies.9 In our case, the relationship between the return on funds and management and custody fees is not significantly different from zero for investment funds as a whole (see table 2); i.e. in general terms it would seem that the funds which charge the highest fees of this type are able to obtain higher gross yields, but in a relatively similar amount to the increase in the fee.10 By focus, the estimated coefficient is positive for mixed equity income funds but negative for Euro equity income and global funds.

The negative relationship found between the performance of funds and the fees charged in the higher risk categories have also been found in other studies,11 which put forward as an explanation the fact that the funds with a poorer historical or ex-pected performance raise their fees strategically and target investors who are “less sensitive to performance” since they do not expect to be able to compete with the best funds in the market targeting more sophisticated investors. It cannot be ruled out that this mechanism may also be operating in the Spanish fund market, in which there is a high degree of concentration and in which the entities may be ca-pable of distinguishing the sensitivity of investors to performance and, consequent-ly, segment and optimally target their offer of funds.

Another possible explanation of this negative relationship which is found between the fees charged by funds and the return on the funds, one which is not wholly in-dependent of the previous explanation and which may also be applicable to the Spanish funds industry, is related to the fixed marketing cost of the funds. The costs associated with the marketing of funds to participants who are going to make rela-tively small contributions are proportionally high for the management company of these funds. Consequently, these fund managers may have an incentive to increase the management and/or custody fee of the funds acquired by these participants in order to recoup, at least in part, the higher marketing cost.

Conversely, the coefficient estimated for subscription and redemption fees is posi-tive and significantly different from zero; in other words, the management compa-nies which set the highest fees for entering or leaving their funds do tend to

9 See Gruber (1996), op. cit. and M. Carhart (1997), “On persistence in mutual fund performance”, in Jour-

nal of Finance, 52, pp. 57-82.

10 Note that the return used for the estimation is expressed in net terms; i.e. discounting management and

custody fees. Hence the interpretation of the result.

11 J. Gil-Bazo and P. Ruiz Verdú (2009), “The relation between price and performance in the mutual fund

industry”, in Journal of Finance, 64 (5), pp. 2153-2183.


Estimation of the equation of the determinants of net return: single-focuses vs. mixed-focuses TABLE 3

TOTAL FI RF RFM RVM RVE RVI GL

Return (t-1) 0.009(0.941)

-0.209(0.372)

-0.144(0.529)

-0.062(0.788)

-0.006(0.980)

0.029(0.732)

-0.234(0.101)

Volatility (t-1) -0.488(0.404)

2.079**(0.042)

3.153**(0.010)

1.622(0.163)

2.199(0.141)

1.729***(0.000)

-0.125(0.766)


0.047(0.479)

0.205**(0.043)

-0.027(0.856)

0.043(0.772)

0.065(0.387)

-0.034(0.688)


0.067(0.557)

0.251(0.168)

0.729*(0.081)

-1.168**(0.040)

0.379(0.202)

-0.660*(0.099)


0.004(0.953)

-0.027(0.641)

0.894*(0.087)

-0.029(0.576)

0.265*(0.059)

-0.080(0.631)

Age of the fund (t) -0.007(0.910)

-0.094**(0.028)

0.312(0.229)

-1.062*(0.051)

-0.023(0.476)

0.276(0.174)

0.209(0.275)


-0.010(0.789)

-0.122*(0.062)

-0.070(0.485)

0.058(0.660)

-0.160***(0.003)

-0.128*(0.069)


0.001(0.897)

0.008(0.618)

0.012(0.741)

-0.024**(0.045)

-0.014**(0.018)

-0.004(0.823)

Percentage of assets in the hands of institutional investors (t)

-0.413**(0.029)

-0.817*(0.099)

0.012(0.962)

-2.403(0.139)

-2.139*(0.052)

0.169(0.172)

-0.111(0.625)

BANCO 7.851***(0.000)

4.218*(0.067)

0.158(0.729)

1.872(0.189)

2.860**(0.015)

1.632***(0.009)

-0.341(0.406)

CAJA 4.013***(0.001)

1.992**(0.038)

-0.226(0.565)

-0.592(0.616)

1.414**(0.021)

0.784**(0.039)

0.122(0.289)

FUSIÓN -0.180(0.894)

-0.493(0.220)

0.249(0.390)

0.091(0.842)

0.085(0.806)

1.476***(0.001)

0.683*(0.097)

CAMBIOVOC -0.429(0.542)

Hypothesis tests

m1 -2.19(0.028)

-2.08(0.037)

-2.40(0.016)

-2.04(0.041)

-2.39(0.017)

-4.70(0.000)

-2.82(0.005)

m2 -1.88(0.060)

-0.71(0.480)

0.22(0.824)

-0.65(0.517)

-1.38(0.169)

-0.84(0.400)

-1.87(0.062)

Sargan 35.33(0.105)

48.95(0.073)

39.31(0.175)

26.59(0.227)

19.19(0.158)

23.50(0.172)

56.73(0.078)

For comparison purposes:

Number of funds 1,782 585 207 215 202 309 218

Number of observations 15,076 4,838 1,744 1,813 1,693 2,484 1,489

RF: fixed income, RFM: mixed fixed income, RVM: mixed equity income, RVE: Euro equity income, RVI: international equity income and GL: global

funds.

GMM estimation in orthogonal deviations that are robust to heteroscedasticity and serial correlation. As instrumental variables we use lags up to

t-2 of the return, net subscriptions, volatility and assets variables. Estimated coefficients and p-value of the statistic t in parentheses.

*. 10% significance level. **. 5% significance level. ***. 1% significance level.

m1 and m2 correspond to tests on the first- and second-order serial correlations, respectively, on first difference errors. The p-value is provided.

Sargan is a test which checks the validity of the instruments used. The p-value is provided. The null hypothesis tested is “the set of instruments used

is valid”, therefore a sufficiently high p-value (for example, over 0.05) would not reject the validity of the instruments.


compensate their participants with a higher net yield. Breaking down the results by

focus, we find evidence of this in two categories of equity income (mixed equity

income and international equity income), which is logical, since these types of fees

are predominant in these categories of funds and practically non-existent in fixed

income funds.

Age of the fund. The estimations do not detect any significant relationship between

the variable related to the age of the fund and the return on that fund. That is to say,

the more recent funds, which might be benefiting from more sophisticated manage-

ment models, do not provide better yields. This result is consistent with other stud-

ies of the Spanish fund market, such as those of Lassala (1998)12 and Marco (2007),

and of international funds, in which even a negative relationship has been detected

between the age of a fund and its return in the case of equity income funds of some

European countries.

Size of the fund. The hypothesis whereby economies of scale might be exploited

does not find support in the model’s estimations. In this respect it is worth noting

that the average size of Spanish funds is very small in comparison with European

funds and even smaller compared with US funds, so it may be that Spanish funds

may not be large enough for economies of scale to have any significant effect on

their returns. The substantial increase in the number of mergers between funds in

the last two years may lead to a more appropriate offer of funds in the future.

Some authors suggest that the negative relationship between size and return that

they found is explained by the fact that larger funds tend to have a more diversified

portfolio and, therefore, a lower risk and also a lower return.13 This hypothesis is

partially compatible with some of the findings we obtain in this work in the estima-

tions by focus, in which we find this positive relationship between volatility and

return on funds and a negative relationship between size and return.

A final explanation for this negative relationship between size and return on funds

may be linked to the characteristics of the firms which manage the larger funds. As

we will see in the following paragraph, the estimated relationship between the size

of the fund manager and the return on the fund is negative.

Size of the fund manager. The reduced estimation of the model identifies a negative

relationship between the net return of the fund and the size of its fund manager

(measured by market share). The results of a broad estimation for investment funds

as a whole, in which we differentiate market share by the type of financial group the

fund manager belongs to, show that the relationship between the return obtained

by the fund and the size of the fund manager is statistically negative when the fund

manager belongs to a bank, insignificant when the fund manager belongs to a sav-

ings bank, and positive in the case of independent entities. The results of both esti-

mations suggest that large entities, mainly belonging to banks, are able to exercise

considerable market power. Estimations by category find this relationship between

12 C. Lassala (1998), “Factores explicativos de las diferencias de rentabilidad financiera en los FIM de renta

fija”, in Revista Española de Financiación y Contabilidad, vol. XXVI, No. 97, pp. 1005-1031.

13 Droms and Walker, op. cit.


return and the market share of the fund manager to be negative in the case of pure equity income funds.

Participation of institutional investors. We find a negative relationship between the net return on funds and the percentage of their assets which are in the hands of institutional investors; i.e. those funds with a greater presence of institutional in-vestors which, in theory, are somewhat more sophisticated and tend to show lower returns. This relationship is detected for pure fixed income funds and Euro equity income (see table 3). As far as fixed income focuses are concerned, we might ex-pect this negative relationship to be explained in part by the fact that a substantial part of non-financial companies’ cash surpluses are invested in short-term fixed income funds, about which they may not have carried out a reasonable evaluation of their return. More broadly, this negative relationship between institutional in-vestment and the return on funds may also be due to the fact that there is a certain percentage of institutional investors whose investment in certain funds is not sole-ly driven by considerations of the expected return/risk but pursues additional ob-jectives.14

Type of financial group. The estimations show that fund managers belonging to banks and savings banks obtain higher returns than those belonging to other groups (independent groups). If we break the results down by focus we see that banks and savings banks obtain higher returns than the independent groups in the pure fixed income and pure equity income categories. This result coincides with the findings of Lassala (1998) and partially with those of Marco (2007).

Changes of focus and mergers. The strategic decisions taken by fund managers, such as the change of focus of the fund or its merger with another fund, generally speak-ing do not appear to have a significant effect on the return on the fund. By category, the estimations indicate that funds which have undergone one or more merger proc-esses in the course of the period under study end up having higher returns in the international equity income and global funds categories.

3.2 Results based on the geographic focus of the fund

The most interesting results obtained when we segment the funds according to their geographic focus are as follows:

Persistence. Neither is evidence of persistence found in the returns of the funds if broken down by geographic focus.

Net subscriptions. We obtain a positive and significant coefficient between net sub-scriptions and the return on funds in categories of an international nature, either

14 The commitment of some institutional investors to investing in certain collective investment schemes,

for example in socially responsible investment funds, or the institutional investor’s link with the financial

institution managing or marketing the fund are a couple of examples of factors other than the twin

considerations of expected return and risk which may influence the investment decision of institutional

investors. In this respect, we should also note the existence of significant investments of investment

funds in other investment funds of the same CIS.


Estimation of the equation of the determinants of the return by geographic focus of the fund TABLE 4

TOTAL FI RF RF Int RV RV Int GL

Return (t-1) 0.009(0.941)

-0.230(0.317)

-0.023(0.840)

0.021(0.918)

0.001(0.993)

-0.234(0.101)

Volatility (t-1) -0.488(0.404)

1.357*(0.094)

0.940*(0.091)

0.246(0.738)

1.306*(0.052)

-0.125(0.766)


0.109(0.219)

0.150*(0.072)

-0.288*(0.073)

0.260**(0.049)

-0.034(0.688)


0.078(0.574)

0.035(0.504)

-1.599*(0.077)

0.184(0.710)

-0.660*(0.099)


-0.242(0.116)

-0.158(0.157)

-0.057(0.359)

0.476*(0.052)

-0.080(0.631)

Age of the fund (t) -0.007(0.910)

-0.075(0.111)

-0.299**(0.026)

-0.472*(0.067)

0.338(0.259)

0.209(0.275)


-0.171*(0.057)

0.110***(0.009)

0.237(0.166)

0.004(0.967)

-0.128*(0.069)


-0.031***(0.003)

0.012*(0.058)

-0.025**(0.027)

-0.079**(0.012)

-0.004(0.823)

Percentage of assets in the hands of institutional investors (t)

-0.413**(0.029)

-2.669**(0.013)

-0.150(0.119)

-3.494***(0.006)

0.156(0.385)

-0.111(0.625)

BANCO 7.851***(0.000)

3.763**(0.021)

-0.099(0.342)

3.291***(0.006)

2.089*(0.060)

-0.341(0.406)

CAJA 4.013***(0.001)

1.469**(0.040)

-0.946(0.261)

1.419***(0.009)

1.807**(0.025)

0.122(0.289)

FUSIÓN -0.180(0.894)

-0.609(0.228)

0.012(0.929)

-0.749(0.192)

1.798**(0.033)

0.683*(0.097)

CAMBIOVOC -0.429(0.542)

Hypothesis tests

m1 -2.19(0.028)

-2.72(0.007)

-3.13(0.002)

-2.32(0.020)

-2.68(0.007)

-2.82(0.005)

m2 -1.88(0.060)

-0.73(0.463)

-1.27(0.203)

-1.95(0.052)

-0.78(0.436)

-1.87(0.062)

Sargan 35.33(0.105)

42.60(0.063)

46.46(0.137)

16.77(0.158)

23.44(0.435)

56.73(0.078)

For comparison purposes:

Number of funds 1,782 674 116 351 374 218

Number of observations 15,076 5,609 903 2,968 2,979 1,489

RF: fixed income, RFM: mixed fixed income, RVM: mixed equity income, RVE: Euro equity income, RVI: international equity income and GL: global

funds.

GMM estimation in orthogonal deviations that are robust to heteroscedasticity and serial correlation. As instrumental variables we use lags up to

t-2 of the return, net subscriptions, volatility and assets variables. Estimated coefficients and p-value of the statistic t in parentheses.

*. 10% significance level. **. 5% significance level. ***. 1% significance level.

m1 and m2 correspond to tests on the first- and second-order serial correlations, respectively, on first difference errors. The p-value is provided.

Sargan is a test which checks the validity of the instruments used. The p-value is provided. The null hypothesis tested is “the set of instruments used

is valid”, therefore a sufficiently high p-value (for example, over 0.05) would not reject the validity of the instruments.


fixed income or equity income. Thus, in these focuses the investors seem to show a certain degree of skill in the selection of funds. However, we obtain a negative and significant coefficient between net subscriptions and the return on funds in the do-mestic equity income category.

Management and custody fees. The coefficient associated with this variable contin-ues the trend of the previous section when focuses are analysed. Thus, we find a negative relationship between these fees and the return in the case of domestic eq-uity income and global funds. Once again, for the riskier funds, those that charge higher fees of this type do not compensate the participants with higher net returns. For the rest of the categories, the coefficient is not significantly different from zero.

Subscription and redemption fees. We detect a positive relationship between explicit fees and the performance of international equity income funds. This result is similar to that of the estimations in the previous point.

Size of the fund manager. The negative relationship between the market share of the fund manager and the return on the funds which we found for the funds as a whole is maintained in the two equity income categories, while for fixed income the re-sults are mixed. Thus, for domestic fixed income funds this relationship continues to be negative, while for international fixed income funds the relationship is signifi-cantly positive. This latter relationship can be explained by the fact that in this cat-egory the presence of fund managers belonging to savings banks or independent groups (where the relationship between market share and return is positive) is greater.

Participation of institutional investors in the fund. As has been mentioned previously, the model detects a negative relationship between the percentage of assets in the hands of institutional investors and the return on the fund in the domestic fixed income and equity income categories.

Type of financial group. We find that banks and savings banks obtain better returns than independent groups in the equity income categories and in domestic fixed in-come funds.

Mergers. According to estimations, funds which have undergone one or more merg-er processes during the period under study end up having better returns in the cat-egories of international equity income and global funds.

4 Conclusions

In this article we present the main results of a recent study of the return on Spanish investment funds.15 This study is framed within the literature on investment funds which has attempted to find an answer to the apparent paradox arising on the one hand, from the relatively poor performance delivered by many of these products

15 See Cambón (2011), op. cit.


and, on the other, by their great popularity among investors. However, unlike other papers, this study does not evaluate the reasonableness of the return on investment funds, but provides an estimation of the influence of a number of different factors on that return during the period 2000-2009. The results obtained, based on the esti-mation of a panel data model, indicate that, for funds as a whole, current returns are not related to past returns. We also found that funds with higher management and custody fees do not always tend to compensate their participants with higher net returns.

The existence of funds which charge higher fees in the case of a certain level of re-turns suggests the presence of certain factors which may be limiting the mobility of investors when it comes to reassigning their savings among different funds, which gives the fund managers a certain degree of market power, especially the larger ones. In fact, the funds offered by these fund managers tend to show relatively lower returns. In this respect, it may be that, as has been suggested in previous lit-erature, the fund managers offer products with a more modest expected return to investors who are less sensitive to performance, adjusting their fees strategically. Finally, the evidence presented in this article indicates that the age or size of the fund does not seem to have any significant influence on its performance, while the funds of fund managers belonging to banks and savings banks obtain higher net returns, particularly in the case of equity income funds.

The use of ratings in financial regulation: measures and proposals

Ramiro Losada López (*)

(*) Ramiro Losada López is a member of the Studies, Statistics and Publications Department of the CNMV.


1 Introduction

Credit rating agencies enjoyed a sterling reputation in the financial markets until the early years of the 21st century when there was a wave of bankruptcies and ac-counting scandals affecting major corporations such as Enron in the United States or Parmalat in Italy.1 The slow response of the rating agencies in these cases caused many to start to question their work and especially their independence from the is-suers who contracted them and the quality of their ratings. The outbreak of these scandals prompted a wide-ranging debate in the United States and Europe on the need to review how agencies are regulated, which spawned a number of initiatives. Thus, in the United States it was decided to establish direct supervision of the agen-cies by the Securities and Exchange Commission (SEC), through the passing of the Credit Rating Agency Reform Act2 in 2006. Europe, however, mostly opted for self-regulation by adopting the Code of Conduct published by IOSCO in 2004,3 consist-ing of a catalogue of best practices for rating agencies.

The current crisis has put the work of the rating agencies under the microscope once again. In particular, the quality of their work regarding the rating of securitisation assets during the years immediately prior to the outbreak of the financial crisis was called into question. In particular, the low quality of these ratings was evidenced by the successive downgrades which affected many products that had initially received the highest possible credit rating. This phenomenon was especially common in the United States (see figure 1). In fact, in the case of the United States, the considerable percentage of defaults in securitisation issues made in the period immediately prior to the crisis also suggests the existence of an upward bias of the initial ratings (see figure 2).

1 Enron filed for bankruptcy protection late in 2001, both in the United States and in Europe. Meanwhile,

the Parmalat case became public in 2003.

2 See US Congress (2006), Credit Rating Agency Reform Act of 2006 (S. 3850).

3 See IOSCO (2004), Code of Conduct Fundamentals for Credit Rating Agencies, available at http://www.

iosco.org/library/pubdocs/pdf/IOSCOPD180.pdf



88 Reports and Analyses. The use of ratings in financial regulation: measures and proposals

Downgrades of mortgage-backed securities per issue rating1 FIGURE 1

1 downgrade 2 downgrade 3 or more downgradews

100

80

60

40

20

0USA Spain

AAA

USA Spain

AA

USA Spain

A

USA Spain

BBB

USA Spain

BB

%

Source: Standard and Poor’s and CNMV.

1 Percentage of securities suffering one, two and three or more downgrades of their credit rating after their

issue, between the first quarter of 2005 and the third quarter of 2007. The + and – signs appended to the

ratings are included in each category on the horizontal axis (for example, AA includes AA+, AA and AA-).

Data as at 29 October 2009.

Percentage of US mortgage-backed securities in default, FIGURE 2

classified according to their issue rating1

100

90

80

70

60

50

40

30

20

10

0AAA AA+ AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ BAA

%

Source: Standard and Poor’s.

1 Percentage of asset-backed securities issued from the first quarter of 2005 to the third quarter of 2007.

Data as at 29 October 2009.

The reasons why the ratings assigned in the period prior to the crisis did not prop-erly reflect the credit risk of securitisation issues are diverse and complex.4 Many highlight the use of ratings for the purpose of financial regulation among these rea-sons, pointing out that this circumstance may weaken the agencies’ incentives to produce high quality ratings.

4 See, for example, P. Bolton, X. Freixas and J. Shapiro (2009), The credit ratings game, NBER Working Paper

No. 14712; A. Ashcraft, P. Goldsmith-Pinkham and J. Vickery (2009), The role of incentives in the rating of

mortgage-backed securities, Federal Reserve Bank of New York Working Paper; and R. Losada (2009),

Agencias de rating: hacia una nueva regulación [Rating agencies: towards a new regulation] CNMV, Wor-

king Paper No. 34.


Thus, in principle, if the demand for ratings from the agencies only depended on the reputation of their ratings, the agencies would have a proper incentive to issue ratings of the highest possible quality. Under these conditions a drop in the quality of its ratings may not damage the agency initially, but it would later on, as soon as the investors became aware of this loss of quality. However, the situation could change substantially if the demand for a rating agency were not to depend only on its reputation but also on the regulatory value the ratings may have for those par-ticipating in the markets. In this case, many experts agree in pointing out that the intensive use of ratings in regulation weakens the role of reputation as a basic incen-tive to uphold the quality of ratings. With regard to securitisation issues, academic literature has shown how this weakening of the reputation mechanism significantly helped agencies to issue ratings of a less than desirable quality.5

The use of ratings for regulatory purposes is widespread at an international level. Among other significant examples we should mention the first version of the Capi-tal Requirements Directive for Credit Institutions, through which Basel II was im-plemented in Europe, and the amendment made by the SEC in the United States to rule 15c3-1 on net capital requirements for brokers and dealers.6 In both regulations, the ratings of the instruments constituting the assets of financial institutions were used as basic information when determining the solvency of financial institutions. Another example which underlines the important role played by ratings in regula-tion is their use in the field of collective investment, specifically to limit the pool of assets in which monetary collective investment schemes can invest.7

In response to the perceived deterioration in the quality of ratings, several interna-tional authorities, including the Financial Stability Board and the European Commission,8 made recommendations and adopted measures intended to reduce the reliance of financial regulation on ratings from rating agencies. The purpose of this article is to present and provide an initial general analysis of the regulatory solu-tions that the various authorities have proposed for this purpose.

The article is structured as follows. In the second section we describe the use of rat-ings in financial regulation. In the third section we analyse the effect that ratings-based regulation has on the quality of ratings. In the fourth section we analyse re-cent proposals from international authorities aimed at reducing ratings-based regulation. Finally, in the fifth section we present our conclusions.

5 See D. Bongaerts, K.J. Cremers and W. Goetzmann (2009), Multiple ratings and credit spreads, NBER Wor-

king Paper No. 15331; A. Champsaur (2005), The regulation of credit rating agencies in the U.S. and the E.U.:

recent initiatives and proposals, Working Paper, Harvard Law School; and J. Mason and J. Rosner (2007),

Where did the risk go? How misapplied bond ratings caused mortgage-backed securities and collateralized

debt obligation market disruptions, SSRN Working Paper No. 1027475.

6 The capital requirements directive is Directive 2006/48/EC of the European Parliament and of the Coun-

cil, of 14 June 2006, on the capital adequacy of investment firms and credit institutions. Rule 15c3-1, on

Net capital requirements for brokers and dealers, was reformed by the SEC on 24 November 1992 and

entered into force on 1 January 1993.

7 Of particular interest, as we mention later, is the level 3 European regulation on monetary funds, see

CESR (2010), CESR’s guidelines on a common definition of European Money market funds, Document

CESR/10-049).

8 See Financial Stability Board (2010), Principles for reducing reliance on CRA ratings (27 October) and Euro-

pean Commission (2010), Public consultation on credit rating agencies (5 November).


2 The use of ratings in financial regulation

Debt contracts typically generate a principal-agent relationship between the bor-rower (agent) and the lender (principal). The former tends to have more informa-tion than the latter about their own creditworthiness and, therefore, may have an incentive to provide the lender with inappropriate information. This is why lend-ers tend to distrust information provided by borrowers, which gives rise to a situa-tion known in financial literature as “adverse selection”. In situations of this nature, the available information may not allow lenders to discriminate between borrow-ers on the basis of credit risk, which in turn may lead to borrowers with a low credit risk not finding funding at interest rates commensurate with their real situ-ation.

In this context, rating agencies offer a service which provides an independent as-sessment of borrowers’ credit risks, aimed at mitigating the problems caused by asymmetric information. Their opinions, when they are of an appropriate quality, reduce the cost of accessing information for agents operating in debt markets, and help those markets to be more efficient, which is reflected in the fact that debt issuers pay margins on their debt which are better aligned with their credit risk.

As well as their role as assessors of the credit risk of issuers and issues, rating agen-cies are also entrusted by financial regulators to perform the important function of certification. Thus, financial regulation has been using ratings as important infor-mation for setting certain regulatory requirements. In recent decades ratings have been mainly used in three areas of regulation:

– Prudential regulation. In this area the use of ratings became appreciably more important as a result of the Basel II Capital Accord, introduced in 2004. The recommendations of this agreement considered the possibility of using the ratings issued by rating agencies to measure the credit risk associated with credit institutions’ portfolios. As mentioned earlier, the European regulation included this possibility in Directive 2006/48/EC, of the European Parliament and of the Council, relating to the taking up and pursuit of the business of credit institutions. In the United States there was also an adaptation of the rules along these same lines which, in the case of brokers in securities markets, was instrumented via a net capital rule drawn up by the SEC and included in Article 15c3-1 of the 1933 Securities Act.

– Regulation of the investment limits applicable to certain institutional inves-tors. These restrictions particularly affect collective investment schemes and pension funds investing in high risk financial assets, normally assets with a rating lower than BBB-. In the United States one example of this type of regula-tion was the 1935 Banking Act, whereby national banks were obliged to buy investment grade assets. As has already been mentioned, another example, in this case in Europe, is the level 3 regulation published by the CESR in 2010, implementing Directive 2009/65/EC, of the European Parliament and of the Council, of 13 July 2009, on the coordination of laws, regulations, and admin-istrative provisions relating to undertakings of collective investment in trans-ferable securities (UCITS). In this level 3 regulation, short-term monetary


funds are obliged to invest in assets rated by one of the agencies operating under ESMA supervision. Also, investment of this type of funds is limited to assets whose ratings are equal to or better than the second highest rating cat-egory that the agency has on the short-term scale.

– Regulation of transparency. In some cases issuers with a high rating may ben-efit from a more flexible treatment in regulatory matters. Thus, for example, French legislation allows the Autorité des Marchés Financiers (AMF) to reduce the transparency requirements of issuers with higher ratings.

In addition to their use as input in various types of regulations, agencies also facili-tate standardisation. The scales used by the agencies to classify their opinions on solvency enable investors to compare the risk of different debt issues, regardless of the sector, country or financial product they correspond to.

For agencies to properly carry out the three functions mentioned above (provision of information, certification and standardisation), the ratings they issue must be of an adequate quality. In fact, the idea underlying the use of ratings in regulation is that they are of high quality and faithfully reflect the credit risk of issuers and issues. However, as we will see later in this article, the intensive use of ratings for regula-tory purposes may, on occasion, have had a negative impact on the quality of the ratings in the years prior to the crisis.

3 The effect of the use of ratings for regulatory purposes on the quality of those ratings

If rating agencies are to issue ratings of an appropriate quality, it is necessary for the reputation mechanism to function properly; that is to say, that the agencies must have an incentive to consistently maintain the high quality of their ratings. If the demand for rating agencies depended only on the informational value that inves-tors ascribe to ratings, the reputation mechanism would ensure that the ratings were of the required quality. However, for certain investors with a significant weight in the market (credit institutions, institutional investors and other financial institu-tions), the call for credit ratings does not only depend on their informational value, but also on the usefulness of ratings when it comes to meeting certain regulatory requirements. If this component has a significant bearing on the demand for rating agencies, the incentive that the latter have to maintain their ratings at a high level may be adversely affected.

The regulators establish a number of requirements to be met before the ratings from rating agencies may be used for regulatory purposes. Thus, in the seventies, the SEC created a registration system for rating agencies wishing their ratings to be included in regulations (Nationally Recognized Statistical Rating Organisation, NRSRO). The designation of an agency as an NRSRO would require the SEC to issue a report stat-ing that no action should be taken to prevent registration (no action letter). The designation criteria were generic and subject to a certain degree of discretion. Basi-cally the agency’s ratings had to be reliable, credible and widely used in the markets. This system was in force in the United States until 2008, the year a new NRSRO


system was introduced pursuant to the promulgation of the Credit Rating Agency Reform Act in 2006.9

The NRSRO designation system introduced new entry barriers in an industry which in many respects was already a natural oligopoly due to the importance of reputa-tion, which encouraged a considerable concentration of market power in a small number of agencies. Bear in mind that if an agency is well-established in the market it will normally enjoy healthy profits. Also, if the number of potential newcomers tends to shrink, so will competitive pressure, particularly the pressure to innovate methods, with the consequent potential loss of quality of ratings in the long term.

In the literature on rating agencies, some authors provide evidence of the impor-tance of regulatory objectives in the issue of ratings during the pre-crisis period and their impact on the quality of those ratings. In particular, Bongaerts et al. (2009)10 describe how in financial regulations, especially those in which investment grade issues are treated differently from speculative issues, ratings played an important role in the composition of the demand for agencies’ services. In particular, these authors provide evidence that, in the corporate bond market, issuers assessed by the two main agencies only contracted a third one when there were doubts concerning whether the issuer was of investment grade. In other words, a third agency was only contracted with the purpose of ensuring that the issuer maintained or reached in-vestment grade.

Other previous papers, such as Champsaur (2005) and Mason and Rosner (2007),11 also link to a great extent the performance of rating agencies before the crisis with the regulation to which they are subject, mainly the NRSRO system of the United States. In particular, these articles show that the negative impact of the regulatory use of the ratings issued by rating agencies on their quality was especially signifi-cant in the case of securitisation issues, due to the fact that these types of issues were of great regulatory value for both issuers and investors.

In addition to their direct effect on the quality of the ratings, the use of ratings for regulatory purposes is a potential source of other negative consequences. In particu-lar, Sy12 describes how the use of ratings for regulatory purposes in the years prior to the current crisis caused a number of investors to base their investment on com-

9 In Europe there is also a mechanism for designating agencies whose ratings can be used for the purpo-

ses of regulation. This system is the result of Directive 2006/48/EC, of the European Parliament and of the

Council, relating to the taking up and pursuit of the business of credit institutions. This directive establis-

hes the rules that agencies must abide by for their ratings to be eligible for use in the calculation of en-

tities’ regulatory capital. The agencies which meet these requirements are called External Credit As-

sessment Institutions (ECAI). The requirements which an agency must meet to become an ECAI are of a

diverse nature, but perhaps the most important of them is that their ratings must be recognised by the

market and be considered to be credible and reliable by their users. As is the case with the NRSRO sys-

tem, once an agency is designated as an ECAI it appears to be unlikely to be deprived of that status by

the supervisors. Currently, in Europe, rating agencies need to be registered and come under the super-

vision of the European Securities and Markets Authority (ESMA) to be able to become an ECAI.

10 See note 5.

11 See note 5.

12 See A.N.R. Sy (2009), The systemic regulation of credit rating agencies and rated markets, IMF Working Pa-

per 09/129.


plex products, such as asset-backed securities, without carrying out their own analy-sis of the advisability of such investments.

Apart from the poor quality of some of the asset-backed securities issued before the crisis, especially in the United States, it is interesting to look at the performance of the ratings of two of the main types of issues for which agencies provide ratings: corporate and sovereign issues. Various analysts and experts have pointed out that, since the outbreak of the crisis, ratings have been adjusted to reflect the credit im-pairment of the issuers, although the downgrades may not have been made quickly enough. These analysts and experts argue that ratings have been downgraded when the credit impairment has already been largely discounted by the market by means of the CDS market.13

One possible explanation of the apparent rigidity in the downgrading of ratings is the potential conflict of interest facing agencies due to the fact that it is the issuers who pay them to issue their ratings. Ratings-based regulation, mainly that which affects investors in debt, may also have contributed to this pattern in the adjustment of ratings. This type of regulation may mean that changes in ratings made by the agencies directly affect the solvency of the issuer at that moment. More specifically, a rating downgrade may cause the issuer to enter a downward spiral due to being penalised by regulations which use ratings as a reference.14 Thus, for example, regu-lations such as the one governing capital requirements for financial institutions, in which the credit ratings of the institutions’ assets play an important role, or regula-tions which prevent certain collective investment schemes from investing in assets with a rating below a certain threshold, may penalise this type of institution if they invest in securities whose rating has been downgraded. As a result, such institutions will tend to avoid making investments of this kind. The degree of caution regarding this type of investment will be especially high at moments of great uncertainty in the market in respect of the solvency of the issuer. This regulatory effect may ex-plain, at least in part, why there often tends to be a time lag between the appearance of information about the credit risk of the asset in question provided by market in-dicators, such as spreads in fixed income prices or CDS,15 and the agencies down-grading their ratings.

4 Regulatory proposals

The realisation that the ratings issued on asset-backed securities of the pre-crisis period were not of an adequate quality placed rating agencies at the heart of the

13 See, for example, J. Hull, M. Predescu and A. White (2004), “The relationship between credit default swap

spreads, bond yields, and credit rating announcements, in Journal of Banking and Finance”, vol. 28, pp.

2789-2811, and A. di Cesare (2006), “Do market-based indicators anticipate rating agencies? Evidence for

international banks”, in Economic Notes, vol. 35, pp. 121-150.

14 The best known regulatory effect is the cliff effect. This effect refers to when certain investors have to

immediately dispose of part of their portfolio due to the rating of certain instruments falling below a

given threshold.

15 See, for example, E. Altman and H. Rijken (2004), “How ratings agencies achieve rating stability, in Journal

of Banking and Finance”, pp. 2679-2714, and D. Lando and T. Skodeberg (2002), “Analyzing rating transi-

tions and rating drift with continuous observations”, in Journal of Banking and Finance, vol. 26, pp. 423-444.


debate over the causes of the financial crisis and the proposals for reform tabled by the G20. In April 2008, the Financial Stability Forum (FSF), soon to be replaced by the current FSB, made a number of recommendations aimed at improving the qual-ity of ratings. These recommendations can be divided into two categories: in the first would be those which directly affect the performance of the agencies and in the second those which affect them indirectly.16

In the first category of measures, the FSF recommended IOSCO to review their Code of Conduct for the sector,17 which dated from 2004 and was non-binding, with a threefold purpose: to oblige agencies to take steps to avoid conflicts of interest, to allow investors to have access to the methodologies and criteria used to produce the ratings, and to increase competition in the rating agency sector. Following this rec-ommendation, the code was reviewed that same year.18 However, both the Europe-an Union and the United States decided to take this recommendation-based ap-proach a step further and introduced legislation to regulate and supervise the rating agencies. In the European Union, Regulation 1060/2009, of the European Parlia-ment and of the Council, on credit rating agencies and its subsequent reform,19 called for the mandatory registration of these entities and their direct supervision by the European Securities and Markets Authority (ESMA). Similarly, in the United States, the 2006 Credit Rating Agency Reform Act, and its subsequent reform by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, made manda-tory the registration and direct supervision of rating agencies by the SEC.

In the second category of measures, as one of the main points of interest the FSF recommended that a study be made of the influence that the extensive use of ratings for regulatory purposes may have had on their quality. Subsequently, in November 2010, the FSB established a series of principles, later endorsed by the G20, in order to reduce the presence of ratings in financial regulation. The reduction proposal covered five fields: the financial supervision of banks, the investment policies of institutional investors, the operations of central banks, guarantee requirements in the trading of assets, and transparency requirements for issuers of securities. One of the main aims of these principles was to reduce the number of forced sales caused by rating changes, since such sales can exacerbate procyclicality and be a cause of systemic risk.

The FSB stated that the principles agreed upon should be implemented by means of: 1) the removal from the regulation of references to ratings issued by rating agencies and their replacement, whenever possible, by other alternative credit risk assess-ments and 2) the development by credit institutions, institutional investors, and

16 See Financial Stability Forum (2008), Enhancing market and institutional resilience, available at http://

www.financialtabilityboard.org/publications/r_0904d.pdf. In this report a diagnosis is made and recom-

mendations are presented with regard to how to improve the situation in the markets and in financial

institutions. In particular, the report analysed the role of rating agencies during the crisis and proposed

measures aimed at improving the quality of the ratings issued by those agencies.

17 See note 3.

18 See IOSCO (2008), Code of Conduct Fundamentals for Credit Rating Agencies, available at http://www.ios-

co.org/library/pubdocs/pdf/IOSCOPD271.pdf.

19 See European Parliament and the Council of the European Union (2009), Regulation no. 1060/2009 of

the European Parliament and of the Council of the European Union, of 16 September 2009, on credit

rating agencies.

http://www.financialtabilityboard.org/publications/r_0904d.pdf

http://www.financialtabilityboard.org/publications/r_0904d.pdf




other participants of their own methods for assessing credit risk, so that these insti-tutions no longer have to make investment decisions based solely on ratings issued by rating agencies.

The FSB’s recommendations have already been taken into consideration, both by the Basel Committee on Banking Supervision in the production of the new capital framework for banks (known as Basel III), and in the regulatory reform carried out in the United States. In the latter country, the FSB’s recommendations have already begun to be implemented. Thus, Section 939 of the aforementioned 2010 Dodd- -Frank Act calls on federal agencies to review their regulations in order to replace references to ratings of issues or issuers. The US authorities call for the ratings to be replaced by other alternative credit risk measures, especially by internal models constructed by the market participants themselves. Pursuant to this mandate, the various agencies are currently discussing and proposing how to implement this measure. Specifically, the SEC has already proposed reforming the 1940 Investment Company Act to remove references to agency ratings, which particularly affects the determination of the assets eligible to form part of monetary funds. Therefore, in the near future, we can expect a considerable proportion of ratings-based regula-tions to disappear from financial regulation in the United States.

In the European Union, the debate as to whether there is a need to reduce ratings- -based regulation is not at such an advanced stage. In November 2010, the European Commission launched a consultation document on rating agencies which was in-tended to cover unaddressed regulatory matters regarding these entities. One of the main issues addressed by the proposal is the reduction of the reliance on ratings by financial regulation and the manner in which such a reduction would be imple-mented. In particular, the document proposes reducing ratings-based regulation in three specific areas:

– In the calculation of the capital requirements of regulated entities.

– In the internal risk calculation systems of regulated financial institutions.

– In the calculation of the thresholds limiting the universe of assets in which certain institutional investors, especially UCITS and pension funds, can invest.

This reduction would be carried out by replacing credit ratings by internal models which would be designed by the entities themselves, following the general princi-ples set out in the regulation. The measures proposed in the consultation document are expected to modify a number of European regulations. More specifically, the first objective to be set by the European Commission is to reform Directive 2006/48/EC on the capital adequacy of investment firms and credit institutions to bring it in line with Basel III rules in this matter.

In addition to the proposals of the European Commission, the Governing Council of the European Central Bank, as reported in the Annual Report for 2009, is studying the possibility of reducing reliance on ratings in Eurosystem funding operations.

As can be gathered from the arguments presented in the third section of this article, a reduction in ratings-based regulation is, on the whole, desirable, insofar as it may


help to increase the quality of ratings by strengthening the reputation mechanism in the rating agency sector. However, the replacement of ratings in financial regula-tion by other alternative indicators of credit risk level also has a cost attached. For example, if, as the FSB proposes, ratings-based regulation is to a large extent re-placed by assessments originating from internal models developed by the entities under supervision, risk assessment costs may increase significantly for those enti-ties, as will the cost of supervision for the public regulator.

Furthermore, there is no guarantee that entities can, as a rule, individually make better assessments of credit risk than the agencies can. In fact, even supposing that the entities made the assessments diligently, it is unlikely that all of them would have access to enough information about issuers and issues to make a proper analy-sis. For this reason, if the entities are to be able to make their own analyses, it would be necessary to increase the transparency of debt issuers and issues, especially in the case of securitisation issues.

In addition to the difficulty of accessing information, the fund managers of super-vised entities will not always have the proper incentives to make an appropriate credit risk analysis. Generally speaking, fund managers receive a bonus when the firm makes a profit over and above a certain threshold, but their remuneration is not reduced in the same proportion when the firm makes a loss. This asymmetry may encourage the use of credit risk assessment models which allow entities to take ex-cessive risks, as was demonstrated, for example, by the leading five US investment banks during the financial crisis. Regulation will oblige the models of supervised entities to meet certain general principles to offset these incentives, but they may not be enough to cancel them out.

Also, due to the costs involved in implementing the internal models proposed by the European Commission, especially for the smaller financial institutions, it may not be advisable to completely eliminate references to ratings. In fact, the mandatory nature of the models creates an entry barrier of a regulatory nature in the industry and, if no alternative is proposed for smaller firms, it may in the long term create a competition problem in the financial sector.

In any event, if it were decided to impose the use of internal models in supervised entities, it would be advisable not to remove other public measures of risk like rat-ings from the regulations. Since the incentives of fund managers are not always aligned with general interest, it would be advisable for there to be some kind of counterbalance, in this case alternative assessments, to the results delivered by in-ternal models.

Another way to complement the information contained in ratings and reduce their role in regulation is the use of credit risk measurements based on the prices of the market instruments which contain that risk, such as the spreads of bonds or CDS.20 To date, the main international authorities have been reluctant to use this type of

20 Loffler shows how measures based on market instruments were better than ratings in terms of risk, ex-

pected losses, and the measures of risk-return in a portfolio with instruments with credit risk in the years

1983 to 2002. See G. Loffler (2004), “Ratings versus market-based measures of default risk in portfolio

governance”, in Journal of Banking and Finance, vol. 28, pp. 2715-2746.


indicator in financial regulation, arguing that very often these types of instruments do not have sufficient liquidity and that their prices may be very volatile, especially at times of crisis. A high level of volatility could give rise to a procyclical effect on the capital requirements of credit institutions or an increase in forced sales in stressed scenarios, in the case of supervised entities. However, the problems associ-ated with excess volatility could be mitigated if a monthly average or some other kind of statistic were taken as a reference to smooth out the daily price volatility of these instruments. That problem could also be minimised by taking ratings as a measurement of credit risk when the volatility of the reference market instruments exceeded a certain threshold.

5 Conclusions

The financial crisis which began in 2007 showed that the ratings which had been is-sued for some asset-backed securities, especially in the United States, had underesti-mated the credit risk which these products actually had. Although the reasons why the agencies issued ratings with a less than desirable quality are many and varied, one major factor to be taken into account is the influence of ratings-based regulation. Thus, the widespread use of ratings for reasons connected with the regulatory frame-work may have weakened the reputation mechanism by exposing the agencies to a demand which did not depend only on the informational value of their ratings.

In this context, a debate has recently been initiated among various authorities with responsibility for financial regulation concerning how to reduce the excessive reli-ance on ratings of financial regulation. In a first round of measures, the FSB recom-mended a review of the Code of Conduct, a voluntary code drawn up by IOSCO in 2004, with a dual objective: to make the agencies’ activity more transparent and to minimise conflicts of interest between issuers and the agencies themselves. In the case of the United States and the European Union, the legislators took things a step further and amended the regulations, bringing the rating agencies’ activity under the direct supervision of the SEC and the ESMA, respectively.

More recently, the FSB has shown its concern for the influence that ratings-based regulation may have had on the quality of the ratings assigned to securitisation is-sues prior to the crisis. Thus, in November 2010, the FSB approved a series of prin-ciples, which were endorsed by the G20, with the aim of reducing the use of ratings in financial regulation. Specifically, the FSB proposed that this reduction be effected as a general rule via the models constructed by financial market participants for their internal use.

The FSB’s recommendations prompted a swift response in the United States in the form of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act which calls for a reduction in ratings-based regulation. This new law also provides for the replacement of ratings by internal models constructed by the entities par-ticipating in the market. In the case of the European Union, after a public consulta-tion, the FSB’s recommendations are expected to be implemented by means of the reform of several regulations, including, and as a priority, Directive 2006/48/EC on the capital adequacy of investment firms and credit institutions.


The aim of the measures proposed by the FSB for the reduction of the use of ratings in financial regulation is a desirable one, since it strengthens the reputation mecha-nism among rating agencies and, therefore, the quality of their ratings. However, the replacement of ratings by the use of internal models by the entities is not to be taken lightly. The extensive use of internal models would bring about a rise in the cost of credit risk assessment and of its supervision. In addition to these direct costs we would have to add the indirect costs resulting from increasing the transparency of issuers so that all entities would have access to the information required to make their measurements.

But perhaps the greatest drawback arising from the use of internal models is the incentives that the managers of these firms might have to make assessments under-estimating the risks taken on by their entity. It is common for fund managers to receive a bonus when the firm makes a profit over and above a certain threshold, but their remuneration is not reduced in the same proportion when the firm makes a loss. Although the regulation may provide general principles for constructing these internal models, it is unlikely that they will be enough to counterbalance the manag-ers’ incentive to underestimate the risks. One way of mitigating these incentive- -related problems might be to not totally eliminate the reference to ratings in the fi-nancial regulation, but rather complement them with information and analyses from internal sources and also with credit risk indicators based on market data, such as spreads in the prices of the bonds in question or in their CDS.

III Regulatory Novelties

Modifications to the securities market as a result of the Sustainable Economy Act

Adela Aguilar, Fernando Ibáñez and Ángel Domínguez (*)

(*) Adela Aguilar, Fernando Ibáñez and Ángel Domínguez belong to the CNMV’s Entity Authorisation and

Registration Department, Litigation Service and Penalty Regime Department and Financial and Corpo-

rate Reports Department respectively.


1 Introduction

This article describes the main modifications introduced in the securities market by the Sustainable Economy Act 2/2011 of 4 March (hereinafter, SEA). In line with the guidelines adopted by the G-20 and the decisions of the European Union, Chapter III of the SEA includes reform measures for the financial market aimed at increas-ing transparency and the quality of corporate governance.

This article also describes the new aspects introduced by the SEA with regard to the powers of the CNMV. In order for the CNMV to be able to fulfil the tasks entrusted to it by the Law, the ongoing evolution of the securities market requires constant adaptation of the legal regime which regulates the supervision, inspection and dis-ciplinary proceedings for natural and legal persons involved in the securities mar-ket.

In this regard, the Fifth, Seventh and Eighth final provisions of the SEA introduce a series of modifications aimed at strengthening and homogenising the supervision, inspection and disciplinary regime provided in the Securities Market Act 24/1988 of 28 July (hereinafter SMA), Act 35/2003 of 4 November on Collective Investment Schemes (hereinafter, CISA), and Act 25/2005 of 24 November regulating Venture Capital Firms (hereinafter, VCFA).

The article is structured into four sections: The second section analyses the new transparency requirements and corporate governance. The third section studies the modifications introduced in the supervision, inspection and disciplinary regime en-trusted to the CNMV. The last section presents the final considerations.

2 Transparency and corporate governance

The SEA establishes as mandatory certain aspects relating to transparency of direc-tors’ remuneration which, until its entry into force, were recommendations of the Unified Code of Good Governance of Listed Companies.

The SEA therefore establishes that in the General Shareholders’ Meetings held from 2012, listed public limited companies must submit to voting, on an advisory basis and as an item on the agenda, a report on the remuneration of their directors.

According to the Spanish legal framework, listed companies are free to follow or not the good governance recommendations, but on reporting whether they comply with them, they must respect the meaning of the items used to formulate the recommen-dations, especially the definitions of the type of directors.

104 Regulatory Novelties. Modifications to the securities market as a result of the Sustainable Economy Act

The SEA strengthens the scope of these definitions by establishing that the informa-tion included in the Annual Corporate Governance Report1 (hereinafter, ACGR) about the composition of the Board of Directors, its delegated committees and the classification of its directors, must be prepared in accordance with the definitions established by the Ministry of Economy and Finance or, with its express authorisa-tion, the CNMV.

Another of the objectives of the SEA with regard to corporate governance is to im-prove the information which issuers publish about their internal control systems. To this end, it introduces a new heading in the ACGR in which companies must describe the characteristics of their internal control and risk management systems with regard to the process of issuing financial information.

All these new aspects are discussed in detail below.

2.1 Directors’ Remuneration Report

In 2007, two reports from the European Commission were published about the level of incorporation of the Commission’s recommendations published in 2004 and 2005.2 The reports demonstrated that most Member States have adopted recommen-dations relating to the transparency of the remuneration policy into national legisla-tion.

In Spain, these recommendations have not been established as mandatory through being included in Spanish legislation, but they have been incorporated into the Uni-fied Code under the “comply or explain” principle.

According to the declarations included in the ACGR from 2009, only two recommen-dations, both referring to the transparency of directors’ remuneration were followed by less than one third of listed companies. Specifically these were recommendation 40 - that the Board submit a report on the directors’ remuneration policy to the Gen-eral Shareholders’ Meeting, and number 41 - that the report breaks down individual remuneration. In the first case, compliance by listed companies amounted to 21.2% of the total and, in the second case, compliance stood at 28.2% of the total. As shown in figure 1, these compliance percentages were much lower than the average compliance with the 58 recommendations in the Unified Code.

According to the declarations included in the ACGR, in the three years that the Uni-fied Code has been applied, there has been no significant improvement in the level of compliance with these two recommendations.

1 Listed companies must prepare an annual corporate governance report which details aspects such as

the structure of ownership, the structure of the company’s administration, related-party transactions,

risk control systems, the General Shareholders’ Meeting and the level of compliance with the corporate

governance recommendations. The obligation to file this annual report is included in Article 61(2) of the

SEA.

2 Recommendation 2004/913/EC fostering an appropriate regime for the remuneration of directors of

listed companies, and Recommendation 2005/162/EC relating to committees of the Board.


Compliance with recommendations 40 and 41 of the Unified Code in 2009 FIGURE 1

0

40

80

Vote of the General Remuneración transparency Unified Code

%

Source: Companies’ ACGR and CNMV.

The SEA has incorporated both recommendations into Spanish legislation by estab-lishing that as from the General Shareholders’ Meetings held in the first half of 2012 relating to the previous financial year, listed public limited companies must submit a report on directors’ remuneration to a vote on an advisory nature and as an item on the agenda.

The report, the content of which is pending implementation by means of a ministe-rial order, will include full, clear and understandable information on the company‘s remuneration policy approved by the Board for the year in question and, where ap-propriate, that planned for future years.

It will also include an overall summary of how the remuneration policy was applied over the year, as well as a breakdown of the individual remuneration accrued by each one of the directors.

2.2 Update of the Unified Code

In June 2009, the European Commission published a new recommendation on the remuneration systems of directors of listed companies complementing certain as-pects of those published in 2004 and 2005.

In this recommendation, the European Commission invited States to organise na-tional consultations addressed to the interested parties and to report on the mea-sures adopted to promote application of the recommendation so that the Commis-sion may closely monitor and assess the need to adopt new provisions.

With the aim of complying with this European Commission recommendation, the CNMV drew up a draft update of the Unified Code of Good Governance which in-corporated all the measures recommended by the European Commission and re-pealed the recommendations which had been included as a rule in the SEA.

The proposal for updating the Unified Code was submitted to public consultation between 17 December 2009 and 17 February 2010. Among the comments received, we can highlight the contributions from the members of the special working group


which had advised the CNMV in preparing the Code, as well as those of other per-sons and institutions of recognised standing.

With these contributions, an update of the Unified Code has been drawn up which includes the new recommendations of the European Commission on remuneration systems which, once the SEA has entered into force, will be submitted for approval by the Board of the CNMV.

The new recommendations which the Unified Code incorporates are as follows:

1 That the fixed part accounts for a sufficient percentage of total remuneration.

It is recommended that the fixed part of the remuneration is sufficiently large so that the remuneration of the dedication, qualification and responsibility which the office of director entails is adequate, even in the event that the com-pany agrees not to pay the variable part as it considers that the director has not satisfactorily fulfilled the performance appraisal criteria.

2 That the variable components are linked to predetermined and measurable performance appraisal criteria.

The variable components of the remuneration should be linked to predeter-mined performance appraisal criteria which are measurable and which aim to encourage the sustainability of the company in the long term, including non-financial criteria.

3 That a part of the variable component is postponed.

It is recommended that a significant part of the variable component of the re-muneration be postponed for a period of time which makes it possible to veri-fy whether the conditions to which its payment were subject have been met.

4 That a deferment period of at least three years is established in share-based remuneration systems.

In order to align the interests of the directors with those of the shareholders, in share-based remuneration systems, it is recommended that the company estab-lish a deferment period of at least three years from the company‘s decision to grant said remuneration.

It is also recommended that the directors are obliged to fully maintain, up to the end of their term of office, a number of shares equivalent to twice the value of their total annual remuneration, without prejudice to the disposal of the shares necessary to finance their acquisition cost.

5 That claw-back clauses are included.

Contractual agreements should include clauses or formulas which allow the company to claim back payment of the variable components when the pay-ment has been made without fulfilling the conditions to which it was subject or when it was made as a result of data shown to be inaccurate.


6 That limits are placed on severance pay.

It is recommended that payments for the termination of the contract of directors do not exceed the amount of their fixed annual remuneration over two years.

7 Finally, the new recommendations assign more tasks to the remuneration committee. Specifically, said committee is entrusted to:

• Periodically review the remuneration policy applied to executive direc-tors and senior management, and to ensure that this is proportionate to that paid to other directors and executives.

• Carry out, where appropriate, careful selection of the external advisers so as to ensure that they are not in a situation of conflict of interest.

2.3 Types of directors

One of the basic principles of the Unified Code is the existence of binding defini-tions. Listed companies are free to follow or not the good governance recommenda-tions, but on reporting whether they comply with them, they must respect the meaning that the Code contributes to the concepts which it uses to formulate them.

These definitions include the classification of directors as executive, representing leading shareholders or independent as established in CNMV Circular 4/2007, which amends the model for the annual corporate governance report of listed public lim-ited companies.

The annual reviews which the CNMV makes of the ACGR have revealed situations in which the use of appropriate classifications for some members of the Board may be questioned. The most frequent incidents occur in the classification of indepen-dent directors, which has led to requests being sent for additional information, clar-ifications or, where appropriate, the publication of an additional information docu-ment with the new classification of the affected director.

The SEA strengthens the scope of the definitions used to classify directors, by estab-lishing that the information included in the ACGR on the composition of the Board of Directors, its delegated committees and the classification of its directors must be prepared in accordance with the definitions established by the Ministry of Economy and Finance or, with its express authorisation, the CNMV.

Specifically, the SEA establishes that in order to include a director within the cate-gory of independent director it will be necessary to take into account, among other considerations, that the persons are designated, where appropriate, at the proposal of the appointments committee based on personal and professional conditions, and that they may perform their functions without being dependent on their relations with the company, its significant shareholders or its executives.

The Ministry of Economy and Finance or, with its express authorisation, the CNMV, will determine the conditions which a director must meet in order to be classified as


independent, as well as the situations in which said director may not be classified as such.

For this purpose, the SEA establishes that the following situations, inter alia, estab-lished in the Unified Code may be taken into account when excluding a director from the classification of independent:

– Having been an employee or executive director of companies in the group.

– Being or having been a partner in an external auditor or responsible for the auditors‘ report.

– Being a spouse or person linked by a similar affective relationship, or up to sec-ond level relative of an executive director or senior manager in the company.

2.4 Annual Corporate Governance Report of listed public limited companies

As indicated above, the SEA, with regard to corporate governance, also aims to im-prove the information which issuers publish about their internal control systems. To this end, it introduces a new heading in the ACGR in which they have to describe the characteristics of their internal control and risk management systems with re-gard to the process for issuing financial information.

Given that this mandate was provided in the first drafts of the future Act, in April 2009 the CNMV approved the creation of a group of experts entrusted to draw up a report with recommendations for internal control over the reliability of the finan-cial information which included proposals for regulatory changes, a catalogue of principles and good practices and support guides for reporting and supervising, as well as recommendations for the treatment of entities which request their admis-sion to trading for the first time.

The working group was made up of 12 experts from listed companies, the four most representative external auditing firms in the securities market, the Institute of Inter-nal Auditors, a professor of commercial law and the CNMV, with the CNMV per-forming support and secretarial tasks. The working group reviewed the current Spanish legislative framework with regard to internal control and that of other sim-ilar countries, and agreed proposals for improvement with regard to internal control systems for the reliability of financial information.

A document with the group‘s recommendations was published in June 2010.3 The support guide included in this document contains the reference indicators that listed companies must use to report on their internal control and risk management systems.

The changes introduced by the SEA (new information on internal control systems, definitions of directors and remuneration report) and the updating of the Unified

3 The document is available at the CNMV’s website (http://www.cnmv.es/Portal/Publicaciones/SCIIF.aspx).


Code involve amending the model ACGR so as to include the new information re-quirements.

In 2011, a new CNMV circular will be approved with a new model ACGR which in-cludes these changes, as well as the technical improvements which the companies and issuer associations have requested.

3 Amendments to the supervision, inspection and disciplinary regime attributed to the CNMV

The amendments introduced by the SEA mean that new entities will be subject to the CNMV’s supervision, inspection and disciplinary powers. New supervisory pow-ers are also granted to the CNMV and amendments are made both to the regulation of professional secrecy and disciplinary administrative proceedings. Noteworthy as-pects of the reform include both the introduction of a regulation aimed at strength-ening the compensation of damages to investors and clients, and the improvements in the classification of facts amounting to a breach.

3.1 New entities subject to the CNMV’s supervision, inspection and disciplinary powers

The SEA adds the following entities to the entities subject to the supervision, inspec-tion and disciplinary regime provided in the prior wording of Article 84 of the SMA: i) companies which manage securities registration, clearing and settlement systems created under the provisions of the SMA, ii) the companies which hold a stake in the capital which confers them direct or indirect control of the entities subject to the supervision, inspection and disciplinary regime, iii) the persons or entities which hold the condition of members of the clearing and settlement systems of the trans-actions performed on an official secondary market, and iv) management companies of CIS when they provide investment services.

For its part, the new wording that the SEA gives to Article 69 of the CISA adds the following as entities subject to the supervision, inspection and disciplinary proce-dures of this Act, in addition to those provided in the previous wording: i) the agents of the Spanish management companies of collective investment schemes (Spanish acronym: SGIIC) provided in Title IV of the CISA, with the supervision and inspec-tion powers extending to any office or centre of these companies in Spain or abroad, and ii) those who occupy administration, management or similar positions in the legal entities subject to the supervision regime.

3.2 New supervision and inspection powers of the CNMV and unification of authority

The amendments introduced by the new wording that the SEA gives to Article 85 of the SMA strengthens the supervision and inspection powers granted to the CNMV, granting it the following additional powers:


1 That of requiring the persons or entities subject to supervision to send the CNMV those reports which are necessary, drawn up by independent experts, auditors or by their own internal control or compliance bodies so as to provide evidence that the supervised entity complies with the rules and provisions ap-plicable to it and that it has complied with the requirements for rectification or correction made by the CNMV.

This new power will significantly speed up the CNMV’s supervision and in-spection actions as it may require that the fieldwork, which with the previous wording could only be carried out by CNMV staff, may also be carried out by independent third persons or qualified bodies and sent to the CNMV by the supervised entities. Accordingly, evaluations of the CNMV and, as the case may be, rectification of the problems detected may be completed in a much shorter time, which in turn leads to greater supervision effectiveness.

2 That of adopting preventive measures, a concept which substitutes that of the provisional measure included in the previous wording, adding as a new meas-ure, in addition to those already provided in the previous wording, that of temporarily banning the exercise of professional activities. In addition, adop-tion of these measures shall be dependent only on their need for effective in-vestor protection or correct functioning of markets, therefore eliminating the limits established in the previous wording.

3 That of requiring the entities which provide investment services to make avail-able to the CNMV the recordings made of the commercial telephone conversa-tions held with their clients and investors.

This new power may represent an effective instrument when verifying these entities’ compliance with the rules of conduct.

4 That of accessing the information and data that it requires in exercising its supervision and inspection functions without it being possible to object to information and data being submitted on the basis of personal data protec-tion, currently regulated in Constitutional Law 15/9099, of 13 December, on Personal Data Protection (the Data Protection Act). For this purpose, the new wording of Article 85 expressly declares that the exercising of the CNMV’s su-pervision and inspection functions is included under Article 11.2 a) of said legal text, a fact which was already recognised in the report issued by the Data Protection Agency prior to this reform. Similarly, in line with the spir-it of said personal data protection legislation, it is expressly declared that the data to which the CNMV has access in exercising its functions will only be employed in carrying out its powers and in the terms provided in the SMA.

This legislative clarification, carried out in line with the content of the afore-mentioned Act 15/1999 and the content of the aforementioned reports con-ducted by the Data Protection Agency at the request of the CNMV, removes the possible objections and delays resulting from the supervised parties oppos-ing the sending of information based on an interested interpretation of data protection legislation.


5 That of requesting from public authorities, chambers and corporations, col-leges, boards of colleges, professional associations and other public entities and, in general, any entity which exercises public functions, the data, docu-ments, registers, reports and background information that are necessary for executing its functions, with these entities being obliged to provide the CNMV with the collaboration, help and protection necessary to carry out its functions.

With this new duty for collaboration of the aforementioned entities, the CNMV significantly increases its capacity to access information which was previously off-limits.

6 That of using electronic means to communicate and make requests to the enti-ties and persons supervised for the information and measures included in the SMA and its implementing legislation. At the same time, the supervised per-sons and entities are obliged to authorise the technical resources required by the CNMV in order to achieve full effectiveness of the notification and com-munications using electronic systems. All of this is to be done respecting the principles and guarantees established in Act 11/2007 of 22 June on online ac-cess of citizens to public services.

This reform gives a significant boost to electronic communications between the CNMV and supervised entities and hence, speeds up the communications and relations in the field of supervision and inspection.

7 For the first time, the probative effect of the documents which include the facts verified by CNMV staff is recognised when, after having been duly authorised by the Board, the staff perform supervision and inspection functions. This probative value of the verified facts does not cancel the possible probative ac-tion which may be provided by the supervised entities in defence of their rights and interests. However, this amendment increases the authority of the CNMV’s staff and will speed up the investigation of disciplinary proceedings. However, it should be clarified that the probative effect is limited to the facts verified in the supervision and inspection actions and does not include the as-sessments and conclusions which may be derived from those facts, nor the content of the reports carried out subsequently.

8 The SEA extends to all the entities listed in Article 84.1 of the SMA the power of the Ministry of Economy and Finance and, with its express authorisation, the CNMV to regulate the registers, internal databases or statistics and docu-ments which said entities must maintain. In the previous wording, this power only affected investment service firms.

9 The SEA extends the power of the CNMV to require investment service firms or their groups to adopt the measures necessary to safeguard their solvency, not only with regard to internal control systems, which was the situation prior to the reform, but the measures may also be required with regard to account-ing and valuation systems.

The SEA also introduces new wording to Article 70 of the CISA, which, in line with the reform of the SMA, regulates the supervision and inspection


powers of the CNMV with regard to the entities subject to said Act. This regulation is carried out by means of an express reference to Article 85 of the SMA mentioned above. In addition, on specifying the scope of the supervi-sion and inspection of the persons and entities subject to this control, it adds the legal, technical and economic-financial situation, the internal controls, and accounting and valuation systems to those already provided in the previ-ous wording.

With regard to the supervision and inspection functions which the VCFA at-tributed to the CNMV, the SEA adds a new heading 7 to Article 50 which ex-pressly refers to the content of the provisions included in Article 70 of the CISA, which in practice leads to a real reference to Article 85 of the SMA. Con-sequently, the SEA unifies the supervision and inspection powers granted to the CNMV by the SMA, the CISA and the VCFA.

3.3 Amendment to the regulation of professional secrecy

The SEA introduces a new exception to the duty of secrecy regulated in Article 90 of the SMA by adding letter ll) to point four of the Article. Accordingly, an exception is made to the obligation of secrecy and therefore, the CNMV is empowered to send the information which, in the exercise of its functions, the Spanish supervisor au-thorities require with regard to energy and the supervisory authorities of the Mer-cado Ibérico de la Energía Eléctrica (Iberian Electricity Market). However, in order to provide maximum guarantees of the rights protected with the obligation of pro-fessional secrecy, the reform provides that the disclosure of the communicated in-formation requires the express agreement of the CNMV.

It should be remembered that the obligation to safeguard the information of the reserved data, i.e. all that which is not public, such as the data filed in the registers held by the CNMV to which investors have free access, affects all the persons that perform or have performed their professional activity in the CNMV.

3.4 Amendments in the administrative disciplinary procedure

In this context, we can highlight the amendment that the SEA introduces to Article 97.1 of the SMA, which consists of eliminating the mandatory, but non-binding, report which, according to the previous wording, the Advisory Committee of the CNMV had to issue prior to adoption by the Board of the agreement to send the Ministry of Economy and Finance the proposals for resolution for the imposition of very serious fines.

The new wording of that Article resulting from the SEA eliminates the reference to the authority of the CNMV with regard to the initiation, investigation and resolu-tion of proceedings for breach of the regime for trading treasury shares of public limited companies, which was expressly included in the previous wording. Howev-er, this removal does not mean that the CNMV loses this authority, as it is still in-cluded in Article 157.6 of the Capital Companies Act.


It also removes the reference which the SMA made to Articles 7, 14 and 15 of Act 26/1988 of 29 July on Discipline and Intervention of Credit Institutions (hereinafter, Credit Institution Discipline Act), with these issues now being directly regulated in the SMA. Accordingly, i) Article 7 of the Credit Institution Discipline Act referred to in the regulation on the prescription period for breaches is now regulated, in the same terms, in the new Article 101(2) of the SMA, ii) Article 14 of the Credit Institu-tion Discipline Act, which established the criteria for classifying the penalties to be imposed, is now regulated in the new Article 106(3) of the SMA in the same terms but adding two new criteria: redress of the damage caused (the effectiveness of which will be commentated later) and the collaboration of the breaching party with the CNMV when clarifying the investigated events, and iii) Article 15 of the Credit Institution Discipline Act, which regulated the liability of directors and executives for the breaches committed by legal persons, is now regulated, in the same terms, in Article 95 the SMA.

The objective of the new aspects or improvements introduced to the CISA with rela-tion to the administrative disciplinary procedure is to homogenise it with the regula-tion in this matter established in the SMA. Accordingly, i) the mandatory report of the Advisory Committee is eliminated, ii) criteria are established for classifying the penalties in line with those established in the SMA and iii) clarification is made, in accordance with the SMA, of those who hold administration or management posi-tions so as to establish possible administrative liability.

Furthermore, a short procedure is established for minor breaches, according to which the penalty may be imposed by processing a summary procedure in which only the hearing of the interested entity will be mandatory.

The new aspects introduced in the VCFA are also aimed at homogenising its regula-tion with the SMA and the CISA. Accordingly, i) persons who hold administrative or management positions are clarified in the same terms, ii) reference is made to Article 88 of the CISA with regard to the criteria to classify the penalties, thus ho-mogenising it with the SMA, and iii) for the prescription of breaches, Article 83 of the CISA will be applicable, thus homogenising it with the SMA.

Similarly, the same procedure provided in the CISA is established for the imposi-tion of penalties for minor breaches.

3.5 Amendments aimed at strengthening the compensation for damage to investors and clients

The SMA provides that the CNMV, together with other obligations, must ensure investor protection in financial markets. In this regard, in order to promote compen-sation for damage caused as a result of incorrect application of the rules of conduct established in Chapter I of Title VII of the SMA by investment service firms and, in general, by those who provide investment services, the SEA has adopted a series of measures aimed at ensuring that said compensation is carried out directly and in a reasonable time by the entities, either voluntarily so as not to damage their clients, or motivated by the possibility of avoiding or mitigating the administrative liability


which may derive from their behaviour. These measures can be grouped into three sections:

1 Amendment of the penalty classifications for breaches of the rules of conduct regulated in the SMA. It should be clarified that, in general, in administrative law the risk generated by committing the breach is punished irrespective of whether effective damage has taken place or not. Nevertheless, as the amend-ments analysed aim to achieve compensation for the investor, in this case the illegal activity of the breaching party must have produced effective damage to the investor’s or client’s assets.

In this regard, the reform distinguishes between i) very serious breaches (Arti-cles 99.z)(2) and 99.z)(3) of the SMA), which require that the conduct is char-acterised by its regular nature, i.e. that it affects a set of clients in such a way that it makes it possible to consider that the breaches are carried out by the entity on an ongoing basis, ii) serious breaches (Article 100.t of the SMA), in which the conduct is not of a regular nature and therefore constitutes an oc-casional or isolated failure to observe the rules with regard to a specific group of clients of the entity, and iii) minor breaches (101.2 b of the SMA) where conduct is characterised by the one single failure to comply with the rules of conduct within the framework of a client relationship (this refers to a new type of breaching party introduced by the SEA).

2 A new and specific cause is introduced which allows entities to avoid their ad-ministrative liability by asset reimbursement of the damages caused to the in-vestors.

Accordingly, the new Article 107(2) of the SMA provides that, in the event of the alleged commission of a minor breach under Article 101.2b), the CNMV may, prior to opening disciplinary proceedings, require the allegedly liable entity to adopt, in a period of 30 days, the appropriate measures to prevent continuation or reiteration of the conduct and to compensate the asset dam-ages caused to investors by its conduct. The entity must provide sufficient evi-dence that it has complied with the two requirements above. In this case, the CNMV may consider that the supervision objectives have been fully met and, therefore, not initiate the disciplinary proceedings.

This new regulation introduces a legal support which may be of great use for quick and effective compensation of the damage caused to investors as a con-sequence of entities failing to comply with the rules of conduct. This situation makes most sense in the claims or formal complaints by investors received in the CNMV when they demonstrate failure to comply with the rules of conduct within the specific relations of providing investment services. There is now an incentive for the entities to compensate the damages caused to the claimant person making the official complaint, which will avoid any possible initiation of disciplinary proceedings.

The objective is greater protection for the investor as it increases the effective-ness and value of the report which resolve the claims presented to the CNMV and provides investors with a route for recovering the damage suffered with-


out the need to resort to a civil lawsuit and, consequently, providing the al-leged party in breach with the possibility, by compensating the investor, of disciplinary proceedings not being initiated, thereby avoiding the imposition of a possible penalty, as the case may be, for the party in breach.

3 Finally reparation of the damage caused has been included as a new cause in the classification of the breaches. This provides an incentive to reimburse the asset damages to investors caused by breaches so that the party in breach may minimise the penalties imposed by compensating the damage caused to its clients.

For its part, the amendments introduced by the SEA in the CISA, in line with the aforementioned amendment to the SMA, incorporates a new Article 88(2), which provides, in the same terms as Article 107(2) of the SMA, the possibility that through compensation and reimbursement of the investor affected by as-set damages as a consequence of the entity committing certain minor breaches, the entity has the possibility of avoiding initiation of disciplinary proceedings. The redress of damages caused by the breach committed by the entity has also been included, in the same terms as in the SMA, as a new cause for classifica-tion of breaches.

With regard to the VCFA, the new causes for classification of the breaches de-scribed above are introduced through reference to Article 88 of the CISA.

3.6 Amendments aimed at improving penalty definitions

The amendments introduced by the SEA with regard to the penalty definitions es-tablished in the SMA are a consequence: i) of the amendments introduced in the substantive rules, which, for consistency, required incorporation of new definitions of breaching parties, ii) of the homogenisation of the definitions established in the SMA with those included in the CISA, and iii) of the incorporation of other aspects which prior to the reform were applicable through reference by the SMA to the Credit Institutions Discipline Act.

Of the set of amendments introduced in the field of the SMA, we can highlight the following:

1 The amendments of the existing penalty definitions 99.a) and c) – and the in-corporation of new penalty definitions – 99.c) (2), (3) and (4) – to include the breaches which may be committed by: i) the governing councils of official secondary markets, ii) the governing councils of multilateral trade facilities, iii) the companies which manage securities registration, clearing and settlement systems created under the SMA, iv) the Sociedad de Sistemas, v) central coun-terparties, vi) the Sociedad de Bolsa, and vii) the companies which own all the shares or a holding which attributes direct or indirect control of the companies or entities referred to in points i), ii) and iii). When said companies or entities fail to comply with: i) the limits to their activity provided in law, ii) the regula-tory rules of the markets or systems, their own regulations or the regulatory rules of their activity, iii) the reporting requirements with regard to the CNMV,


iv) the obligations relating to authorisation, approval or non-objection to their articles of association and regulations, v) requirements with regard to capital structure or level of equity, and vi) the exceptions or limitations imposed by the CNMV with regard to their prices, fees or commissions to be applied.

2 The creation of a new very serious penalty definition – 99.e) – which categorises non-compliance with CNMV requirements for investment service firms with regard to their internal control, accounting or valuation procedures and the mechanisms or strategies for having appropriate resources and a suitable or-ganisational structure when they pose a risk for the entity’s solvency or viability.

3 The withdrawal from penalty definition 99.l.(2) of the requirement to remind of the obligation or reiterate the request for information when this has not been sent to the CNMV, in the event that this makes it difficult to appraise the solvency of the entity or the consolidatable group or financial conglomerate which it forms part of.

4 The withdrawal of the requirement for there to be fraudulent action in order to classify certain conduct as very serious breaches, with regard to the inaccuracy in regulated information or the significant events submitted by the issuers. In addition, in the penalty definition for accounting breaches of issuers, it is re-quired that the inaccuracy is significant for it to be classified as very serious.

5 The creation of a new very serious penalty definition – 99.z(5) – for failure to comply with the preventive measures agreed by the CNMV outside those de-cided in disciplinary proceedings.

6 The creation of a new very serious penalty definition – 99.z(6) – for the ab-sence of a customer service department, and a new serious penalty definition

– 100.z(6) – for poor functioning of the customer service department.

7 The amendment of the classifications with regard to the acquisitions of signifi-cant shareholdings, differentiating the very serious definition, when non-com-pliance occurs in the acquisition of a significant controlling holding, from that classified as serious, applicable to other non-compliances.

8 The creation of the new serious penalty definition – 100.z(4) – for the situation in which investment service firms exceed the limits provided for major risks, when this is a consequence of a decision by the firm and not an unforeseen event.

9 The creation of a new serious penalty definition – 100.ll(2) – for placing issues without complying with the requirements for intervention of an authorised entity, without fulfilling the advertising conditions, the omission of significant data or the inclusion of inaccuracies, incorrect information or misleading data in the aforementioned advertising, when the amount of the issue and the number of affected investors are not significant.

10 The creation of three new minor penalty definitions –101.2.a) and b)– for: i) failure to send the CNMV data or information on time, ii) failure to comply with the duty to collaborate with the supervisory actions of the CNMV, includ-


ing the failure to appear following a summons, when this does not constitute a serious or very serious breach, and iii) one-off non-compliance with the rules of conduct in the framework of a client relationship (penalty definition already analysed previously with regard to the amendments to the compensation of asset damages).

With regard to the penalty definitions established in the CISA, the amendments introduced by the SEA are a consequence: i) of legislative changes, ii) the homogeni-sation process with the SMA and supervisory experience, iii) of better techniques in the breaching party definitions, and iv) of the classification of the penalty definition depending on the existence of certain circumstances. From the set of amendments of this type introduced in the CISA, we can highlight the following:

1 The disciplinary regime now covers the new “side pockets” regulated in Article 28(2) of the CISA, in accordance with the second final provision of Act 5/2009 of 29 June on the reform of the regime for significant shareholdings in invest-ment service firms, in credit institutions and in insurance companies. To this end, two new penalty definitions are established: one which is very serious and includes, as a component of the penalty definition, that non-compliance seriously damages the interests of the shareholders or there is a reiterated con-duct, and another which is serious, when the circumstances which classify non-compliances as very serious do not exist.

In addition, three new penalty definitions are established, deriving from the new regime for significant shareholdings of CIS management companies in-cluded in Act 5/2009. In line with the SMA, the very serious penalty definition requires that non-compliance refers to controlling shareholdings while the two serious penalty definitions refer to other non-compliances.

2 Amendments are incorporated based on supervisory experience and/or ho-mogenisation with the criteria established in the SMA, specifically:

• Non-compliance with the commitments assumed with the CNMV by CIS management companies or investment service firms to rectify the defi-ciencies detected in a supervision or inspection action are classified as very serious when they seriously damage the interests of the sharehold-ers or refer to reiterated conduct, and are otherwise classified as serious.

• Non-compliance with the rules for valuing the assets of CIS, which is clas-sified as very serious when it seriously damages the interests of the share-holders, it refers to reiterated conduct or it has a substantial impact on the net asset value of the CIS. Otherwise, it is classified as serious, or as minor when, as it is once single event of a minor significance, it should not be classified as serious.

• Single non-compliance within the framework of a client relationship with the rules of conduct provided in the SMA. This is classified as a mi-nor breach. This breach is one of those for which administrative liability may be avoided by compensating the asset damages caused, as studied in section 3.5.


• The delegation of functions of the CIS management companies with non-compliance with the conditions established in the rules, which is classi-fied as a very serious breach when the interests of the shareholders are seriously damaged, when referring to reiterated conduct or when it re-duces the internal control capacity or supervision capacity of the CNMV. Otherwise, it is classified as serious.

• Non-compliance with the preventive measures agreed by the CNMV, which is classified as a very serious breach.

• Conducting advertising and failing to comply with the regulations, which is classified as a serious breach.

• The effective administration or management of legal entities subject to the supervision or inspection regime by persons who do not exercise in law in said entities such a position, which is classified as a serious breach.

• Non-compliances relating, inter alia, to limits to investment, ratios, obli-gations with third parties and asset valuation classified as serious, are now classified, following the reform, as minor when they are of limited significance. Administrative liability of this new minor breach may also be avoided by compensating the asset damage caused.

• Failures to comply with the CISA and its implementing regulation may be classified as a minor breach when they are not specifically classified as serious or very serious breaches.

3 The SEA has introduced technical improvements in some of the penalty defini-tions which were already previously classified. These include the following:

• It specifies the obligations, with which failure to comply is classified as very serious with regard to sending the CNMV periodic information, reg-ulated financial information or the data or documents which the CNMV requires in carrying out its functions. A classification of minor breach is given to the failure to send in time information which must be sent to the CNMV, as well as the failure to collaborate and the failure to appear fol-lowing a summons.

• The very serious penalty definition is strengthened with regard to non-com-pliance with equity requirements, by referring to those which must be held at all items and not the equity required to obtain authorisation, as estab-lished in the previous wording of the reform. In addition, the mention of investment service firms is withdrawn as they are not subject to the equity requirements provided in the CISA. Furthermore, a new serious penalty definition is introduced for non-compliance with the reporting require-ments to the CNMV and the conditions established for returning to compli-ance when a management company has equity below the required levels.

• Two new breaches classified as serious are introduced in relation to the collection of fees. The collection of fees for services which have not been


effectively rendered and the collection of fees not provided in the legisla-tion, articles of association or regulations.

• The lack of procedures is classified as a very serious breach. In the previ-ous wording this was only provided as such in the case of deficiency in the proceedings.

• A classification of very serious breach is given to obtaining authorisation as result of false declarations or through irregular means or non-compli-ance with the conditions presented for authorisation.

• The performance by management companies or investment service firms of activities for which they are not authorised is classified as a very seri-ous breach.

• Improper use of reserved names is classified as a serious breach.

4 The reform introduced by the SEA makes the application of the penalty defini-tions of serious or very serious, in certain breaches, dependent on the exist-ence of certain circumstances, such as seriously damaging the interests of the shareholders or reiterated non-compliance. In this regard, the following breaches are classified as very serious or serious:

• Investment in assets other than those authorised.

• Non-compliance with the investment limits or minimum investment ratios.

• Banned transactions with own shares.

• Exceeding the limits with regard to obligations assumed with third par-ties.

• Valuation of the assets of the CIS by means other than those established in legislation.

Finally, the SEA has introduced limited amendments in the breaches established in the VCFA. Specifically, failure to send the CNMV the documents and information which must be sent or which it requests is classified as a very serious breach when this makes it difficult to appraise the solvency of the entity or its asset situation. Similarly, failure to comply with the rules of conduct is classified as serious when it does not constitute a very serious breach.

4 Conclusions

The SEA introduces reform measures in the financial market to increase transpar-ency and to improve corporate governance. As from the General Shareholders’ Meetings held in 2012, listed public limited companies must submit a directors’ re-muneration report to a vote, on an advisory basis and as an item on the agenda.


Another of the objectives of the SEA, with regard to corporate governance, is to im-prove the information which issuers publish on their internal control systems. To this end, it introduces a new heading in the ACGR in which they have to break down the characteristics of the internal control and risk management systems with regard to the process of issuing financial information.

A substantial part of the reform introduces amendments to the legislation of the supervision, inspection and disciplinary regime which the law attributes to the CNMV so as to allow it to appropriately carry on its functions as a supervisory body, as provided by law.

In this regard, the reforms performed by the SEA in the SMA, the CISA and the VCFA with the aim of homogenising the legislation, introduce new entities subject to the supervision, inspection and disciplinary power of the CNMV and grant the CNMV new control powers, as well as partially amending the regulation on profes-sional secrecy and the administrative disciplinary procedure. Furthermore, one of the most substantial and novel reforms is the introduction of a new system for com-pensating the damage caused to investors and clients. Finally, the SEA carries out an improvement of the definitions of breaches.

European Securities and Markets Authority

Josefina Munuera Cebrián and Ángeles Martín de Diego (*)

(*) Josefina Munuera Cebrián and Ángeles Martín de Diego belong to the CNMV’s Entity Authorisation and

Registration Department.


1 Introduction

The European Securities and Markets Authority (ESMA) began operating on 1 January 2011.1 That same day the other two European supervisory authorities were established: The European Banking Authority (EBA) and the European Insur-ance and Occupational Pensions Authority (EIOPA),2 as well as the European Sys-temic Risk Board (ESRB),3 which is responsible for supervising aggregate risks for the financial system of the European Union as a whole.

The immediate origin of the creation of the European Supervisory Authorities (ESAs) is the report prepared by a high-level expert group chaired by Jacques de Larosière, which the European Commission set up in November 2008 to prepare a series of recommendations for strengthening European supervisory arrangements with the aim of improving citizen protection and restoring confidence in the finan-cial system. In its definitive version, issued on 25 February 2009, the expert group recommended strengthening the supervisory framework with the aim of reducing the risk and seriousness of future financial crises and, among other conclusions, recommended the creation of a European System of Financial Supervisors made up of the three aforementioned authorities and the European Systemic Risk Board.

Taking into account the complexity and significance of the issues addressed, it is of no surprise that the new supervisory structure was built among extensive debates which led to the need to make enormous efforts for consensus.4 In the context of the crisis, which highlighted serious deficiencies in financial supervision, both in

1 Regulation (EU) No. 1095/2010 of the European Parliament and of the Council of 24 November establish-

ing a European Supervisory Authority (European Securities and Markets Authority), amending Decision

No. 716/2009/EC and repealing Commission Decision 2009/77/EC (OJEU 2010 L 331/84).

2 Respectively, Regulation (EU) No. 1093/2010 of the European Parliament and of the Council of 24 No-Respectively, Regulation (EU) No. 1093/2010 of the European Parliament and of the Council of 24 No-

vember 2010 establishing a European Supervisory Authority (European Banking Authority), amending

Decision No. 716/2009/EEC and repealing Commission Decision 2009/78/EC (OJEU 2010 L 331/12) and

Regulation (EU) No. 1094/2010 of the European Parliament and of the Council of 24 November 2010 es-

tablishing a European Supervisory Authority (European Insurance and Occupational Pensions Authority),

amending Decision No. 716/2009/EC and repealing Commission Decision 2009/79/EC (OJEU 2010 L

331/48).

3 Regulation (EU) No. 1092/2010 of the European Parliament and of the Council of 24 November 2010 on

European Union macro-prudential oversight of the financial system and establishing a European Sys-

temic Risk Board (OJEU 2010 L 331/1) and Council Regulation (EU) No. 1096/2010 of 17 November con-

ferring specific tasks upon the European Central Bank concerning the functioning of the European Sys-

temic Risk Board (OJEU 2010 L 331/162).

4 For further details about the procedure, see N. Moloney, “The European Securities and Markets Authority

and institutional design for the EU financial market: a tale of two competences: part (1) rule-making”, in

European Business Organisation Law Review, 12 (1) pp. 41-86 (2011). Also see E. Ferran, Understanding the

New Institutional Architecture of EU Financial Market Supervision, University of Cambridge Faculty of Law

Research Paper No. 29/2011 (2010).

124 Regulatory Novelties. European Securities and Markets Authority

specific cases and with regard to the financial system as a whole, it was necessary to materialise the clear political will in an extremely short period of time: it was necessary to carry out a thorough reform to remedy the deficiencies found and to offer a system in line with the objectives of a stable and single Union financial market for financial services, linking national supervisors within a strong Union network.5

In the belief that the Union had reached the limits or even exceeded what could be done with the nature of the former Committees of European Supervisors, including the Committee of European Securities Regulators (CESR), the European Supervisor Authorities not only assume all of its activities but they also incorporate extensive powers both in terms of regulation and in the field of supervision, modifying the distribution of powers in favour of greater Union convergence in both areas.

It was precisely this process of assigning intervention powers which was the main subject of negotiation in order to obtain a cross-institution consensus. A discussion was held with regard to several issues of major importance: the power of ESMA to issue binding decisions, which may be addressed to the competent authorities or supervisors of the Member States in the event of a breach of Community law, as well as in emergency situations or even in the event of a disagreement between su-pervisors (respectively, Article 17, 18 and 19 of Regulation (EU) No. 1095/2010). In addition, the decision on which European institution was to declare the “emergency” and the nature or scope of the get-out clause which may lead to the suspension of a decision adopted by ESMA (Article 38 of the aforementioned Regulation).

In addition to the above, it was necessary to decide on issues relating to the frame-work in which ESMA may adopt decisions and address them to the participants of the stock market and even ban specific products and services, as well as the supervi-sory powers over institutions with cross-border activities or presence and with sys-temic implications or its quasi-regulatory powers and its interrelation with the pow-ers of the Commission and intervention of the Council and the Parliament in this process.6 Regulation 1095/2010 represents the formalisation of the consensus reached in the aforementioned aspects.

This article offers a brief description of the new European supervisory architecture outlined in the previous paragraph. In particular, the article bases its main focus on

5 Recital 8 of Regulation (EU) No. 1095/2010.

6 The creation of European regulatory authorities in liberalised sectors has not traditionally been an easy

issue within the EU, as it has an impact on the distribution of powers between the EU and its Member

States. Accordingly, and with the desire to provide the best legal justification for the creation of the new

Authorities of the European Financial Supervision System – which are created on the basis of Article 114

of the Treaty of Lisbon (formerly Article 95), a recital in each one of the Regulations creating the ESA ex-

pressly refers to the judgement of the CJEU of 2/5/2006 on Case C-217/04 (United Kingdom of Great

Britain and Northern Ireland v. European Parliament and Council of the European Union). In this judge-

ment, the CJEU “established that nothing in the wording of Article 95 EC implies that the addressees of

the measures adopted by the Community legislator on the basis of that provision can only be the indi-

vidual Member States. The legislator may deem it necessary to provide for the establishment of a Com-

munity body responsible for contributing to the implementation of a process of harmonisation in situa-

tions where, in order to facilitate the uniform implementation and application of acts based on that

provision, the adoption of non-binding supporting and framework measures seems appropriate (…)”.


ESMA and specifically, on its organic and functional structure, as well as its powers, responsibility and field of application.

The article is structured as follows: section 2 describes the new architecture of Euro-pean financial supervision of which ESMA forms a part. Section 3 describes the functions and powers of ESMA and its field of application, as well as its internal organisation and the remedies for the decisions of the new authority. Section four includes the main conclusions.

2 The new European supervisory architecture

The European Financial Supervision System is created as a network made up of the ESAs and the national supervisory authorities plus the ESRB. A Joint Committee is established as part of this network to ensure coordination between the ESAs.

2.1 The European Systemic Risk Board

Regulation 1092/2010 recognises the need to exercise European Union macro-pru-dential oversight of the financial system, and therefore establishes the ESRB, which is based in Frankfurt, to monitor and assess potential threats to financial stability deriving from developments in the broader macroeconomic environment and the financial system in order to contribute towards preventing and mitigating systemic risk in the EU.7

The main functions of the ESRB are as follows:

i To identify and prioritise systemic risks, issue warnings where such systemic risks are deemed to be significant (which it may make public) and issue recom-mendations for remedial action including legislative initiatives (which it may also make public).

When significant risks threatening financial stability are identified, the ESRB will issue a warning and, as the case may be, issue recommendations for reme-dial action, including, where appropriate, legislative initiatives. Both warnings and recommendations may be of a general or a specific nature and shall be ad-dressed to the EU as a whole or to one or more Member States, or to one or more of the ESAs, or to one or more of the national supervisory authorities. Recommendations may also be addressed to the European Commission in re-spect of the relevant EU legislation. The ESRB may decide to make the warn-ings and recommendations public after having informed the Council suffi-ciently in advance. The addressees of warnings and recommendations made

7 Article 2 c) of Regulation 1092/2010 defines systemic risk as a risk of disruption in the financial system

with the potential to have serious negative consequences for the internal market and the real economy.

All types of financial intermediaries, markets and infrastructure may be potentially systemically impor-

tant to some degree.


public by the ESRB are entitled to make public their views and reasoning in response thereto.

ii To monitor the follow-up to warnings and recommendations.

The obligation of the addressees of the recommendations is what has been re-ferred to as “act or explain”,8 i.e. to act on them or to provide an adequate jus-tification in case of inaction. If the ESRB considers that the reaction is inade-quate, it should inform the addressees, the Council and, where appropriate, the ESA concerned.

iii To issue a confidential warning to the Council in the event of an emergency situation and provide an assessment of the situation.

If the ESRB detects a risk which could seriously jeopardise the orderly func-tioning and integrity of financial markets or the stability of the whole or part of the Union’s financial system, it should inform the Council. If the ESRB de-termines that an emergency situation may arise, it should contact the Council and provide an assessment of the situation. The Council then assesses the need to adopt a decision addressed to the ESAs within whose authority the emer-gency situation has been identified.

With regard to its internal organisation9 the ESRB has a decision-making body (the General Board), an executive body (the Steering Committee), a representation body (the Chair) and two advisory bodies (the Advisory Scientific Committee and the Advisory Technical Committee), as well as a support body (the Secretariat). The main decision-making body of the ESRB is its General Board, which is made up of, with voting rights, the President and Vice-President of the ECB, the governors of the national central banks, a member of the Commission, the Chairs of the EBA, ESMA and EIOPA, the Chair and two Vice-Chairs of the Advisory Scientific Com-mittee, and the Chair of the Advisory Technical Committee. The participation of the micro-prudential supervisors is provided in some of the above bodies, such as the General Board and the Advisory Technical Committee, in which the CNMV is represented.

2.2 The European supervisory authorities

As indicated above, Regulations (EU) 1093/2010, 1094/2010 and 1095/2010 created respectively, the EBA, EIOPA and ESMA.

The general lines of these regulations are identical (each one of them contains 69 recitals and 82 articles). The differences lie in the objectives of the different ESAs, their field of application and the definitions, which are adapted to the specific char-acteristics of each sector and current Union legislation.

8 See Recital 20 of Regulation (EU) 1092/2010.

9 An ESRB Decision on 20 January 2011 adopted Rules of Procedure relating to its organisation and func-An ESRB Decision on 20 January 2011 adopted Rules of Procedure relating to its organisation and func-

tioning, which supplement Regulations (EU) 1092/2010 and 1096/2010 (OJEU 2011 C58/4).


The ESAs are created as EU bodies with legal personality and enjoy administrative and financial autonomy. They must act independently and objectively, solely in the interest of the EU, and they are accountable to the European Parliament and the Council.

Formally, they substitute the former third level regulatory committees of the Lam-falussy procedure, which was in force up to the introduction of the new authorities. Hence, EBA substitutes the Committee of European Banking Supervisors (CEBS), EIOPA substitutes the Committee of European Insurance and Occupational Pen-sions Supervisors (CEIOPS) and ESMA substitutes the Committee of European Se-curities Regulators (CESR). The head office of the bodies is maintained in all three cases, in London, Frankfurt and Paris respectively.

The Joint Committee

In order to guarantee cross-sectoral consistency of the activities of the ESAs, they must be closely coordinated by means of a joint committee and they must reach, where appropriate, common positions.

The Joint Committee is thus created as a forum with which ESMA will cooperate regularly, ensuring cross-sectoral consistency with EBA and EIOPA, in particular, with regard to aspects which, as a result of the financial crisis, have proven to be essential, such as financial conglomerates, accounting and auditing services, micro-prudential analyses of cross-sectoral developments, risks and vulnerabilities for fi-nancial stability, retail investment products and measures combating money-laun-dering. In addition, the Joint Committee will be the body responsible for exchanging information with the ESRB and developing the relationship between the ESRB and the ESAs. It is made up by the Chairs of the EBA, ESMA and EIOPA, as well as, where appropriate, the Chairs of the subcommittees which are created, and it is chaired, on a rotating basis, for a 12-month period, by the Chairs of the ESAs.

3 ESMA

3.1 Functions and powers

3.1.1 Outline

As indicated above, Regulation 1095/2010 establishes the ESMA’s powers with re-gard to securities markets and their participants within the European Union. Some of these powers are the result of the need to intervene in the event of a crisis or emergency. This is the case of the powers which ESMA has been assigned to adopt mandatory decisions requiring national supervisory authorities and the participants of financial markets to take action in the event of an emergency (Article 18). In ad-dition, ESMA must ensure coordination with regard to managing systemic risk, with participants with cross-border links and with resolving the crises which may occur (Article 22 to 27 and 31), as well as to assume responsibilities with regard to the assessments relating to the resilience of financial market participants to adverse


market developments (Article 32). All of this is to be governed by the general obliga-tion to pay special attention to systemic risk (Article 1.5).

All these powers have significant implications, which should not be minimised, but which are limited in daily practice as they are powers to be used as a “last resort” in exceptional situations.10

However, the quasi-regulatory powers, as well as those relating to supervisory prac-tices, may have the greatest real implications in daily activities. There are powers to develop draft regulatory technical standards and draft implementing technical standards, to develop guidelines and recommendations, to issue an opinion ad-dressed to the European Parliament, Council and the Commission, to collect infor-mation and to develop common methodology and to provide an extensive database on institutions and other participants and information which allows a clear, exten-sive and updated picture of the full European financial system.11

Main powers of ESMA TABLE 1

• Rule-making powers

Regulatory technical standards (Art. 10)

Implementing technical standards (Art. 15)

Guidelines and recommendations (Art. 16)

• Action in the event of a breach (Art. 17)

• Powers in emergency situations (Art.18)

• Settlement of disagreements (Art. 19 and 20)

• College of supervisors, delegation and cooperation (Art. 21, 28 and 31)

• Peer review of competent authorities (Art. 30)

• Tasks related to consumer protection and financial activities (Art. 8 and 9)

• Providing opinions to the European Parliament, the Council or the Commission (Art. 34)

• Collection of information on participants in financial markets (Art. 35)

• Developing a centrally accessible database (Art. 1.2 and 8)

• Specific supervision tasks: authorisation and supervision of credit rating agencies, central counterparties

and repositories; choice of OTC derivatives for clearing

Source: CNMV.

3.1.2 Rule-making powers: Technical standards

3.1.2.1 Definition and general considerations

Since the entry into force of the Treaty on the Functioning of the European Union, referred to as the Treaty of Lisbon, the European Commission, following authorisa-

10 See Question 12 (page 9), Frequently Asked Questions. A Guide to Understanding ESMA, 3 January 2011

(ESMA/2011/009).

11 This has to be put into the context of the review clauses contained in Regulation 1095/2010 and which

are aimed at assessing, before January 2014, the work carried out and for the necessary adjustments to

be performed so as to adapt the activities and powers of ESMA to the actual situation.


tion, may adopt two types of secondary measures or implementing acts which are mutually exclusive: delegated acts, in accordance with the provisions of Article 290, and implementing acts, in accordance with Article 291.

Delegated acts are general non-legislative acts which supplement or amend non-es-sential elements of the legislative act from which they derive. Implementing acts are non-legislative acts which include the uniform conditions for implementing le-gally binding Union acts which require uniform application throughout the Union and which cannot be reached through the measures which States may usually adopt. These acts will normally contain individual decisions, without prejudice to the fact that in some cases they may have a more general scope, although the room for ac-tion by the Commission will be more limited than in delegated acts.

Within the category of delegated acts12 we can distinguish the regulatory technical standards, proposed and adopted in accordance with Articles 10 to 14 of Regulation 1095/2010, and those delegated acts which ESMA is not involved in developing. In the former, a prior legislative act will empower ESMA to develop the draft technical standards and at the same time, the Commission will delegate sufficient power to adopt them. In the latter, the delegation, both of the development of the draft and its approval, will fall exclusively to the Commission, which will not be obliged to consult national experts, although it may choose to do so.

With regard to implementing acts, we can also distinguish between the implement-ing technical standards, developed and adopted in accordance with Article 15 of Regulation 1095/2010, from those implementing acts which ESMA is not involved in developing. In the former, a prior legislative act will empower said Authority to develop the draft implementing standards and at the same time the Commission will delegate sufficient power to adopt them. In the latter, the delegation both of the preparation of the draft and its approval will fall exclusively to the Commission, and control of the Member States will be carried out through intervention during the development stage.

Consequently, Regulation 1095/2010 grants ESMA extremely significant quasi-reg-ulatory powers which may lead to significant intensification of the EU single rulebook,13 even though the limits imposed by the Treaty of Lisbon have a compro-mise, which is not free of controversy, about the control to be executed by the Euro-pean Commission with regard to the independence of ESMA.14 Chapter II includes the powers of ESMA, determining that it must “contribute to the establishment of high-quality, regulatory and supervisory standards and practices”.

The procedure for preparing the draft regulatory technical standards (Article 10) and implementing technical standards (Article 15) are virtually identical with the exception that regulatory technical standards are subject to greater scrutiny by other European institutions. These procedures are developed over several stages and are the product of agreement between Member States and the European institutions

12 Commission Communication to the Parliament and the Council on implementation of Article 290 of the

Treaty on the Functioning of the European Union (COM [2009] 673 Final).

13 See Question 1 (page. 3), Frequently Asked Questions. A Guide to Understanding ESMA, op. cit.

14 Article 63, with regard to the independence of the Board of Supervisors.


involved in the negotiation of the text of the Regulation when designing the delega-tion of powers to the new authority in the context of the limits imposed by the Treaty of Lisbon.

The Securities and Markets Stakeholder Group has been set up to help facilitate consultation with stakeholders in areas relevant to the tasks of ESMA. The Group will be consulted on actions concerning regulatory technical standards and imple-menting technical standards, and on proposals for guidelines and recommenda-tions, when these do not refer to individual participants in financial markets. The Group is made up of thirty members representing, in balanced proportions, finan-cial market participants operating in the EU, their employees’ representatives, con-sumers, users of financial services and representatives of SMEs, as well as academ-ics. The Group includes two Spanish representatives: Carlos Arenillas (former Vice-Chairman of the CNMV), representing the users of financial services, and Pro-fessor Ángel Berges-Lobera, as an independent top-ranking academic.

The power to adopt regulatory technical standards is conferred to the Commission to be executed over a period of four years from the entry into force of Regulation 1095/2010, which may be automatically extended for periods of four years, unless expressly revoked by the European Parliament and Council. Six months prior to the end of the first four-year period, the European Commission will issue a report as-sessing the exercise of this power.

Said standards will be technical and, therefore, their development requires the expe-rience of experts in supervision. In addition, they may not entail strategic decisions or political options and their content will be restricted by the legislative acts on which they are based (Article 10) or will be limited to establishing the application conditions for said acts (Article 15).

When the act entails strategic decisions or political options, the Commission retains the discretion to approve the delegated acts, and in this regard, it is agreed that fu-ture regulations must specify which acts must be endorsed by the Commission and which with the intervention of ESMA.15

In practice, situations will arise in which drawing the line between purely technical issues and/or political strategic issues will not be an easy task as there are technical situations which may have far-reaching consequences. Consequently, the clear de-termination of the distribution of authority in future legislative acts represents a fundamental issue in this regard.

3.1.2.2 Procedure

With regard to the procedure, before presenting the draft technical standards to the Commission, ESMA will carry out public consultations and analyse their poten-

15 In this regard, see Article 3 of Directive 2011/61/EU of the European Parliament and of the Council of 8

June 2011 relating to Alternative Investment Fund Managers and amending Directive 2003/41/EC and

2009/65/EC and Regulations (EC) No. 1060/2009 and (EU) No. 1095/2010.


tial costs and benefits unless said consultations and analyses are disproportionate with regard to the scope and effects of the draft implementing technical standards in question or with regard to the urgency of the issue. The Authority will also col-lect the opinion of the Securities and Markets Stakeholder Group referred to in Article 37.16

When the Authority presents a draft technical standard, the Commission will im-mediately send it on to the European Parliament and the Council. It may endorse the draft implementing technical standard in part or with amendments, where the Union’s interests so require.

When the Commission intends not to endorse a draft technical standard or to en-dorse it in part or with amendments, it shall send the draft technical standard back to ESMA, explaining why it does not endorse it, or, as the case may be, explaining the reasons for its amendments, and ESMA must amend the draft in the periods established for this purpose. If it does not do so, the Commission may endorse the technical standard without the intervention of the Authority.

3.1.2.3 Other considerations

With regard to regulatory technical standards, in accordance with Article 290 of the Treaty of Lisbon, the European Parliament or the Council may revoke the delegation of powers granted to ESMA at any time (Article 12).

Similarly, the European Parliament or the Council may object to a regulatory tech-nical standard prepared by ESMA and endorsed by the Commission in a period of three months from the notification date. This deadline may be extended for an-other three months at the initiative of the European Parliament or the Council (Article 13).

If, on the expiry of the objection period, neither the European Parliament nor the Council has objected to the standard, it shall be published in the Official Journal of the European Union and enter into force on the date stated therein. In practice, this may mean that in the event of a dispute, the period for endorsing the regulatory technical standards may be up to 6 months from the date on which the Commission has endorsed a standard proposed by the ESMA.

Technical standards, once endorsed and published, shall be directly applicable and executable in Member States.

16 In order to facilitate the consultation with the interested parties of the areas related to the functions of

ESMA, Article 37 of Regulation 1095/2010 provides for the creation of a Securities and Markets Stake-

holder Group. It will consist of 30 members, who will be appointed by the Board of Supervisors of ESMA

at the request of the pertinent interested parties, which will provide balanced representation to the

participants in financial markets which operate in the EU, to their employees’ representatives, to their

consumers and to other retail users of financial services and to SMEs. ESMA must consult the stake-

holder group about the regulatory technical standards or implementing technical standards and, to

the extent that they do not refer to individual participants in the financial markets, the guidelines and

recommendations, and to offer them a reasonable opportunity to formulate observations on the meas-

ures proposed.


3.1.3 Guidelines and recommendations

ESMA is also attributed the power to issue non-binding guidelines and recommen-dations addressed to the national supervisory authorities and to market participants so as to establish consistent and uniform supervisory practices, as well as to guaran-tee common and consistent application of Community legislation.

Despite their non-binding nature, Regulation 1095/2010 expressly indicates that the national supervisory authorities must make every effort to comply with the guide-lines or recommendations issued by ESMA, adding as a deterrent measure and, at any event, as a transparency measure, that said authorities must inform in a period of two months from their issue whether they comply or have the intention to com-ply with them or not. In the event that a competent authority does not comply or does not intend to fully comply, it shall inform ESMA, which may publish the rea-sons17 following notification to the corresponding authority.

The level of compliance by the national supervisory authorities will also be included in the annual report which ESMA must prepare and submit to the European Com-mission, the Parliament and the Council, including a mention of the measures which ESMA plans to adopt to ensure compliance with its guidelines or recommen-dations by said authorities.

3.1.4 Action in the event of a breach of Community law

In the event that a national supervisory authority has not applied the provisions contained in the technical standards or has applied them in a manner which may result in a breach of Community law or in which it fails to ensure that a participant or institution complies with the obligations established in said standards, a resolu-tion mechanism is provided consisting of three stages which cover specific events, procedures and deadlines (Article 17).

As a first step, ESMA may investigate the alleged breach or non-application of Com-munity law on its own initiative or at the request of one or more national supervisory authorities, the European Parliament, the Council, the Commission or the Securities and Markets Stakeholder Group. To this end, ESMA may collect the information which it considers relevant from the corresponding national supervisory authority, which is obliged to provide it. In this context, ESMA may address a recommendation to said authority for it to take the necessary measures to re-establish compliance with Community law. The national supervisory authority must inform ESMA of the meas-ures which it has adopted or it proposes to adopt in order to ensure compliance.

As a second step, in the event that the authority has not adopted any measure, the Commission, following communication from ESMA or on its own initiative, will

17 The possibility of adopting guidelines, recommendations and non-binding standards was already as-The possibility of adopting guidelines, recommendations and non-binding standards was already as-

signed to CESR, although the attribution to ESMA of the transparency measure described above is a new

aspect incorporated by Regulation 1095/2010, given that the Commission Decision of 23 January 2009

establishing the Committee of European Securities Regulators, only established that members of the

CESR which did not follow the guidelines, recommendations, standards and other measures agreed by

the CESR must “be prepared to present the reasons for this choice”.


issue a formal opinion requiring the national supervisory authority to take the ac-tion necessary to comply with Community law, taking into account the recommen-dation by ESMA. The national supervisory authority will inform the Commission and ESMA of the action to be carried out to comply with the formal opinion.

As a third step, the resolution mechanism includes the possibility that ESMA may adopt an individual decision directly addressed to a participant or institution, in-cluding cessation of any practice. Said decision must meet the following objectives: (i) maintain or restore “neutral conditions of competition in the market” or (ii) “en-sure the orderly functioning and integrity of the financial system” (Article 17.6).

For this purpose, Regulation 1095/2010 expressly establishes that the decisions of ESMA shall prevail over any previous decision adopted by the competent authori-ties on the same matter (Article 17.7).

3.1.5 Powers in emergency situations

Article 18 provides a warning procedure with less intervention by the Commission than the procedure described in the above section, but subject to the limits deriving from the prohibition on intervening in fiscal/budgetary aspects and which is appli-cable both to the procedure described herein and that established in Article 19 (Ar-ticle 38). Specifically, Article 18 provides that, in the case of “adverse developments which may seriously jeopardise the orderly functioning and integrity of financial markets or the stability of the whole or part of the financial system in the Union”, ESMA may actively facilitate and, where deemed necessary, coordinate any actions undertaken by the relevant national competent supervisory authorities. In order to be able to perform that task, ESMA shall be fully informed of any relevant event, and it shall be invited to participate as an observer in any relevant meeting of na-tional competent supervisory authorities.

However, in some situations simple coordination may not be sufficient, especially when the national supervisory authorities individually lack the necessary instru-ments to react quickly to a cross-border emergency. Therefore, in said circumstanc-es, ESMA is empowered to oblige the aforementioned authorities to jointly adopt specific measures.

Nevertheless, since the determination of the existence of a cross-border emergency situation entails a significant level of discretion, it is the Council that must declare the emergency situation. In this regard, Article 18 establishes that the Council, following a request from any of the ESAs, the Commission or the ESRB, “may adopt a decision addressed to ESMA, in which it determines the existence of an emergency situation”.

Only if the Council endorses this decision, and in the exceptional circumstances in which coordinated action of the national supervisory authorities is necessary to re-spond to adverse situations, ESMA may adopt individual decisions requiring com-petent authorities to take the necessary action to address any such situation.18

18 It should be pointed out that, although the wording of Article 18.3 is not totally clear, there is consensus

in interpreting that this power requires both conditions, i.e. that the Council has issued the declaration

of an emergency situation and that there are “exceptional circumstances”.


In accordance with section 4 of Article 18 of Regulation 1095/2010, where a compe-tent authority does not comply with the decision of ESMA, then ESMA may adopt (where the relevant requirements laid down in sectoral legislation, including the technical standards adopted in accordance with said legislation are directly applica-ble to financial market participants) an individual decision addressed to a financial market participant requiring necessary action to comply with its obligations under that legislation, including the cessation of any practice. The wording of this clause, although similar to the procedure established in Article 17 for resolving alleged breaches of Community law, differs in that its application requires a “manifest breach” instead of a simple breach and, at the same time, where urgent remedying is necessary to restore the orderly functioning or integrity of financial markets or the stability of the whole or part of the financial system in the Union. Decisions adopted by virtue of this procedure shall prevail over any previous decision adopted by the competent authorities in the same matter.

At any event, the measure described in the above paragraph must be understood without prejudice to the possible commencement of breach procedures by the Com-mission against the Member States for failure to fulfil an obligation (Article 258 of the Treaty of Lisbon), without prejudice to the right of the Commission in said cir-cumstances to request provisional measures in accordance with the rules of proce-dure of the Treaty of Lisbon, and without prejudice to any liability of the Member States in accordance with the case-law of the Court of Justice of the EU if its na-tional supervisory authority does not adopt the measures required by ESMA.

Notwithstanding the above, the powers attributed to ESMA in emergency situations have a significant limit in the get-out clause. This provision allows Member States to request that ECOFIN cancels the decisions which ESMA (Article 38) has adopted in use of the procedures established in Article 18 (emergency situations) or Article 19 (disagreement between supervisors) which impinge on the fiscal responsibilities of the Member States.

3.1.6 Mechanism for settling disagreements between national supervisory authorities

Article 19 provides a mechanism for settling disagreements between the different national supervisory authorities. Pursuant to this mechanism, ESMA is empowered to assist the national authorities in conflict with the aim of reaching an agreement in those events in which it can be determined that there are disputes on the basis of

“objective criteria” either at the request of any of the authorities involved or on its own initiative. However, Regulation 1095/2010 provides no guidelines on what are considered objective criteria, which provides a certain margin of discretion to ESMA to initiate the procedure.

Having determined the existence of a dispute, ESMA will firstly act as a mediator. It will set a time limit for conciliation between the national supervisory authorities, taking into account any relevant time period specified in the base legislation as well as “the complexity and urgency of the matter” (Article 19 [2]).

If the national supervisory authorities fail to reach an agreement within the con-ciliation phase, ESMA may require said authorities to adopt decisions or meas-


ures aimed at resolving the disagreement in accordance with and consistent with Community law. The decision by ESMA will be binding on the authorities in-volved.

Without prejudice to the powers which Article 258 of the Treaty of Lisbon confers on the Commission, where a competent national supervisory authority does not comply with the decision of the ESMA and thereby fails to ensure that the financial institution complies with the applicable legislation or the decision adopted in ac-cordance with the paragraphs above, ESMA may adopt an individual decision ad-dressed to said financial institution requiring that it adopt the measures necessary to comply with its obligations under Community law, including the cessation of any practice (Article 19 [4]). The decisions adopted pursuant to this Article shall prevail over any previous decision adopted by the national supervisory authorities on the same matter.

The procedure provided in Article 19 aims to avoid conflict between national super-visors, and between the supervisors and ESMA, as well as to ensure consistent and uniform application of Community law. In practice, ESMA is granted considerable powers both with regard to national authorities, on which it may impose a decision, and with regard to institutions, which it may directly address in the event of a fail-ure to comply with obligations.

3.1.7. Execution of the decisions

Regulation 1095/2010 does not provide the manner of execution of the decisions and measures adopted by ESMA with regard to the procedures included in Article 17 (action in the event of a breach of Community law), Article 18 (emergency situa-tions) and Article 19 (disagreement between supervisors).

During the legislative debates, the European Parliament proposed that in the event of a breach by a market participant of the decision adopted by ESMA, the Authority may initiate a procedure before a national court, which will include all types of sum-mary or interlocutory procedures.19 However, in the end no mention is included. Consequently, the future sectoral and specific legislation will need to be consulted to verify the inclusion of rules in this matter.

3.1.8 Other tasks and responsibilities

In addition to the tasks of ESMA presented above, which have been thoroughly ex-plained due to their special importance, Regulation 1095/2010 confers other tasks and responsibilities, some of which were held by the CESR (although not exactly of the same nature) in accordance with the Commission Decision of 23 January 2009, establishing the Committee of European Securities Regulators,20 while others have been conferred to ESMA for the first time.

19 See the report of the Committee of Economic and Mandatory Affairs of the European Parliament of 3 July

2010, amendment 103.

20 OJEU 2009, L25/18.


The former, for information purposes, includes but is not limited to the following tasks:

– Monitoring, assessing and informing on trends, potential risks and vulnerabil-ities with regard to securities so as to be able to determine at an early stage possible risks existing at a cross-border and cross-sectoral level.21

– Contributing to establishing a common supervisory culture, ensuring uniform procedures and consistent supervisory practices in the EU.

– Stimulating and facilitating delegation of tasks and responsibilities from a na-tional supervisory authority to ESMA or to other national authorities, identify-ing those tasks and responsibilities that can be delegated or jointly exercised by promoting best practices.

– Contributing to promoting and monitoring the functioning of the colleges of supervisors.22

– Periodically conducting peer reviews of some or all of the activities of national supervisory authorities to further strengthen consistency in supervisory out-comes (to that end, methods shall be developed to allow for objective compari-sons of the activities of the national supervisory authorities examined). Based on these reviews, ESMA will publish the best practices that have been identi-fied, and all the other results of the reviews may be publicly disclosed with the agreement of the national supervisory authority subject to the review. On the basis of a review, ESMA may issue non-binding guidelines and recommenda-tions.

– Playing an international and advisory role.23

21 Although ESRB will be responsible for macro-prudential assessment of the financial sector in the EU,

ESMA must continue the work of CESR in this area, as the object of this analysis will be different, in the

sense that the micro-prudential analysis provides an ascending analysis, while the macro-potential anal-

ysis is descending.

22 ESMA has the right to fully participate in the colleges of supervisors (including on-site examinations),

with the aim of streamlining its functioning and information exchange process and to stimulate conver-

gence and consistency between the colleges when applying EU law (thus avoiding distortions in compe-

tition and the regulatory arbitrage which derives from different supervisory practices). Nowadays, in the

strict field of securities there are no colleges of supervisors, unlike in the banking sector, where they play

an extremely important role.

23 Although CESR already exercised these functions, Regulation 1095/2010 provides new powers to

ESMA in this respect. Therefore, in an attempt to respond to the need for actions which make it pos-

sible to build a stronger and more coherent regulation and supervision system for financial services

worldwide, the role of ESMA (and other ESAs) is strengthened as a point of contact for the supervisory

authorities of third countries, providing it with the possibility to enter into administrative agreements

with supervisory authorities, international organisations and third country administrations and to par-

ticipate in preparing decisions on the equivalence of the supervisory regimes in third countries. Regu-

lation 1095/2010 also strengthens the advisory role of ESMA, assigning it the possibility, on its own

initiative, or at the request of the European Parliament, the Council or the Commission to issue opin-

ions addressed to the Parliament, the Council and the Commission on all issues relating to its area of

authority, i.e. assigning it the authority to act as an independent advisory body of said Community

institutions.


From the latter, we can highlight the assignment of responsibilities relating to the European investor compensation scheme,24 or certain tasks assigned to ESMA with regard to systemic risk, as well as its relations with the ESRB. In this regard, ESMA will conduct the following tasks:

– In collaboration with the ESRB, it will develop a common approach for the identification and measurement of systemic risk.

– It shall consider, where appropriate, the monitoring and assessment of sys-temic risk as developed by the ESRB and ESMA, and shall respond to warnings and recommendations by the ESRB.

– It shall draw up, as necessary, additional guidelines and recommendations for key financial market participants, to take account of the systemic risk posed by them.

– Upon a request from one of the national supervisory authorities, the European Parliament, the Council or the Commission, or on its own initiative, ESMA may conduct an inquiry into a particular type of financial activity or type of product or conduct in order to assess potential threats to the integrity of finan-cial markets and make appropriate recommendations for action to the national supervisory authorities concerned.

– Following consultation with the ESRB, ESMA shall establish criteria for the identification and measurement of systemic risks and an adequate stress test-ing regime.

– ESMA shall contribute to active participation in the development and coordi-nation of effective and consistent recovery and resolution plans, procedures in emergency situations and preventive measures to minimise the systemic im-pact of any failure (it may develop, in this regard, regulatory and implement-ing technical standards).

With regard to the specific relations between ESMA and the ESRB, and for the pur-pose of ensuring fluid interaction between macro-prudential and micro-prudential supervision, Regulation 1095/2010 establishes, in addition to the mutual obligation to share all the pertinent information, the obligation of ESMA to ensure appropriate follow-up of the warnings and recommendations which the ESRB addresses to ESMA or to a national supervisory authority, as the case may be. Regulation 1095/2010 specifies the procedure to be followed by ESMA in these cases. If ESMA or the addressee decides not to follow the recommendation of the ESRB, they must explain the reasons – although in general it is established that in discharging its task, ESMA shall take the “utmost account” of the warnings and recommendations of the ESRB.

24 Within the context of the current review of Directive 97/9/EC, relating to the investor compensation

systems, Regulation 1095/2010 indicates that the Commission wishes to pay special attention to the

need for greater harmonisation throughout the EU. Hence, recognition is given to the need that ESMA

play a significant role in this area, assigning the capacity to adopt guidelines and recommendations and

to prepare regulatory technical standards and implementing technical standards in this matter.


Finally, it is important to point out a new attribution of Regulation 1095/2010, relating to the possibility to address a duly justified and reasoned request for in-formation directly to a financial market participant where a national competent authority, which would normally be responsible for providing the information as it is the closest authority, does not or cannot provide such information in a timely fashion.25

3.2 Field of application

3.2.1 Omnibus I Directive

Regulation 1095/2010 already established in Article 1 the sectoral guidelines which had to be amended to allow the new responsibilities, indicating the possibility that new legislation would be drawn up in the future. In this regard, it expressly stated the need to amend, inter alia, the following directives:

– Directive 98/26/EC of 19 May 1998 on settlement finality in payment and secu-rity settlement systems.

– Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004 on the harmonisation of transparency requirements in rela-tion to information about issuers whose securities are admitted to trading on a regulated market.

– Directive 2005/60/EC of the European Parliament and of the Council of 26 Oc-tober 2005 on the prevention of the use of the financial system for the purpose of money-laundering and terrorist financing.

– Directive 2006/48/EC of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions.

– Directive 2004/39/EC of the European Parliament and the Council of 21 April 2004 on markets in financial instruments (MiFID Directive).

– Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS Directive).

– Directive 2006/49/EC of 14 June 2006 on the capital adequacy of investment firms and credit institutions (evaluation methodology, notification of waiver to application of capital requirements).

25 In this regard, Regulation 1095/2010 goes beyond the Commission Decision of 23 January 2009, estab-In this regard, Regulation 1095/2010 goes beyond the Commission Decision of 23 January 2009, estab-

lishing the Committee of European Banking Supervisors, which only entrusted the CESR with the task

of promoting an effective bilateral and multilateral exchange of information between supervisory au-

thorities.


– Regulation (EC) No. 1060/2009 (credit rating agencies).

– Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directive 2003/41/EC and 2009/65/EC and Regulations (EC) No. 1060/2009 and (EU) No. 1095/2010.

It was Directive 2010/78/EU of 24 November 2010 (known as Omnibus I Directive) which was the legislative instrument chosen to carry out the amendments in the aforementioned sectoral directives.

In addition to the general objectives of all Community legislation (ensuring a uni-fied European code, attempting to consistently apply EU rules and ensuring a com-mon supervisory culture), the Omnibus Directive was designed to address the prob-lems found on analysing the legislative framework of each one of the sectoral directives. The aim was essentially to resolve the failures demonstrated in cross- -border supervision, divergent supervisory practices and the fragmentation of super-visory responsibilities in a single group, as well as the lack of consistency and har-monisation of the penalty regime throughout the Union.

The selection of the specific areas for action in each sectoral directive was governed by clear and precise principles. On drawing up the Omnibus Directive, an attempt was made to only select fields which actually contributed effectively to achieving the objectives set, that were truly technical (principle of proportionality), which did not involve strategic decisions or fiscal responsibilities and which could not be achieved by the Member States, thus justifying intervention of the Union (principle of subsidiarity).

In addition, any legislation needed to be based on factual evidence accompanied by a prior periodic cost-benefit analysis, which in turn was preceded by public consul-tation to allow clear, concise and unambiguous technical standards to be drawn up (principle of legislative hierarchy).

In turn, the rules or the intervention had to respect the discretion provided in secto-ral directives (principle of caution in supervision) as well as to guarantee and facili-tate cooperation between supervisors (principle of cooperation).

Bearing in mind the above, the Omnibus Directive was drawn up in such a way that each one of the sectoral directives was defined in the specific areas in which the European supervisory authorities can and should propose technical standards, the specific cases in which the ESAs may intervene using the mechanism for resolving disagreements in those cross-border contexts in which the legislative acts provided for cooperation, as well as the actions of the authorities in specific emergency situa-tions.

Finally, the Omnibus Directive determines specific requirements for registration, communication and information for the national supervisory authorities with re-gard to the corresponding European Authority so that the latter may have as full and up-to-date an image as possible of the financial market and its participants within the Union.


3.2.2 European Regulation on credit rating agencies

The Commission proposed including significant amendments to Regulation (EC) No. 1060/2009 of the European Parliament and of the Council of 16 September 2009 on credit rating agencies, for the purposes of entrusting ESMA with the direct re-sponsibility for supervising these agencies as from July 2011.

As a result of the proposal, on 31 May 2011, Regulation (EU) No. 513/2011 of the European Parliament and of the Council of 11 May 2011 amending Regulation (EC) No. 1060/2009 on credit rating agencies, was published.26

In this context, it was appropriate to clearly define the scope of the responsibilities of the new authority, so that the participants in financial markets could identify which authority was responsible for the activity of credit rating agencies. Accord-ingly, ESMA is assigned general powers with regard to permanent registration and supervision of registered credit rating agencies and must be the exclusive body re-sponsible for registration and supervision of credit rating agencies in the Union. Accordingly, although ESMA may delegate specific tasks to national supervisory authorities, it is explicitly stated that in these circumstances ESMA remains legally responsible.

It is also assigned disciplinary powers. In this regard, during the legislative draft-ing period, the Commission argued that it was the only Community institution empowered to sanction said institutions. With a consensus promoted by the Par-liament, it was finally agreed to grant the new authority powers to impose fines. Accordingly, ESMA is empowered to impose compulsory fines aimed at obliging credit agencies to put an end to an infringement, to supply complete information required by ESMA or to submit to an investigation or on-site inspection. The fines must be imposed based on the seriousness of the infringement. In order to deter-mine the amount of the fine corresponding to a specific infringement, the Author-ity must use a two-step methodology, consisting of setting a basic amount for the fine and adjusting that basic amount, if necessary, by certain coefficients linked to aggravating and mitigating circumstances in order to ensure that the fine is pro-portionate to the seriousness of the infringement committed by a credit rating agency, taking into account the circumstances under which the infringement was committed.

In order to carry out its function effectively, ESMA is empowered to require, by simple request or by decision, all the information necessary from credit rating agen-cies, persons involved in credit rating activities, rated entities and related third par-ties, third parties to whom the credit rating agencies have outsourced operational functions or activities and persons otherwise closely and substantially related to those credit rating agencies or credit rating activities. Similarly, in order to exercise the supervisory powers effectively, ESMA should be able to conduct investigations and on-site inspections.

26 In June, the BOE (Official State Gazette) published Act 15/2011 of 16 June amending certain financial

rules for the application of Regulation (EC) No. 1060/2009 of the European Parliament and of the Council

of 16 September 2009 on credit rating agencies.


It is also empowered to submit draft regulatory technical standards to the Commis-sion with regard to various issues and areas. These issues may include the informa-tion which agencies must provide in their applications for registration, for the ap-plication for certification and for an assessment of its systemic importance as well as other aspects relating to the presentation of the information. On drawing up its draft technical standards, ESMA must assess whether it is appropriate and neces-sary to update the guidelines already issued by the Committee of European Securi-ties Regulators regarding the content of Regulation 1060/2009.

In the areas not covered by technical standards, the Authority should have the pow-er to issue and update non-binding guidelines on aspects related to the application of Regulation No. 1060/2009.

In short, the new provisions show the importance of the powers granted to ESMA in this area, largely as a consequence of the support of the European Parliament for ESMA as a specialised and independent body within the European institutions which is different from the Commission.

3.2.3 Other empowering legislative instruments

3.2.3.1 Omnibus II Directive

On 19 January 2011, the European Commission published its proposal for the Omni-bus II Directive, as it had already announced at the end of 2009. This Directive aims to amend Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 on the prospectus to be published with securities offered to the public or admitted to trading and amending Directive 2001/34/EC, as well as Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) to include the powers of ESMA adjusted to the new supervisory situation.

3.2.3.2 Legislative proposals on OTC derivatives

In September 2010, the Commission published a proposal for a regulation on over- -the-counter (OTC) derivatives, central counterparties (CCP) and repositories pursu-ant to which ESMA is granted significant powers as it must develop a series of draft technical standards in critical areas. It is also granted powers with regard to third country central counterparties and centralisation of information registers on deriva-tives, as well as disciplinary powers in the event of infringements. Once again, ESMA will play a significant role in the new legislation.

3.3 Internal organisation

3.3.1 Decision-making body: the Board of Supervisors

The Board of Supervisors is the main decision-making body of ESMA and, as such, is responsible for adopting the draft technical standards, the opinions, the recom-mendations and the decisions of ESMA.


It is made up, with voting rights, of the head of the competent supervisory authority of each Member State (who, as the case may be, may be accompanied by a repre-sentative of the bodies which administer the investor compensation schemes in each Member State, without voting rights). It also includes, without voting rights, the Chair of ESMA, a representative of the Commission, a representative of the ESRB, a representative of EBA and another of EIOPA. The Executive Director of ESMA may participate in the meetings of the Board of Supervisors, without voting rights. In addition, the Board of Supervisors may decide to admit observers.

In general, its decisions are adopted by a simple majority of its members, with each member having one vote, with one exception: the development of draft technical standards, guidelines and recommendations and the decisions on the financial pro-visions of ESMA, which are adopted by a qualified majority.27

The Chair and the members of the Board of Supervisors with voting rights must act independently and objectively solely in the interests of the EU as a whole, and may not request or accept any instruction from EU institutions or bodies or any Govern-ment of a Member State or any other private or public entity. Neither the Member States nor the EU institutions or bodies, not any other public or private entity may try to exercise their influence over the members of the Board of Supervisors.

3.3.2. Administration body: the Management Board

The Management Board ensures that ESMA complies with its obligations and car-ries out its assigned tasks and is responsible for preparing the working program and the program for adopting its internal regulation.

The Management Board is composed of, with voting rights, the Chair of ESMA and another six members of the Board of Supervisors, elected by the members with voting rights of said Board. It is also made up, without voting rights, of the Executive Director of ESMA and by a representative from the Commission. The members of the Manage-ment Board are subject to the same obligations of independence and objectivity as described above for the members of the Board of Supervisors. Its decisions are adopt-ed by majority of the members present, with each member having one vote.

The Vice-President of the CNMV, Fernando Restoy, forms part of the first Manage-ment Board of ESMA.

3.3.3. Representation body: the Chair

ESMA is represented by a full-time Chair, designated by the Board of Supervisors on the basis of his/her merits, following an open selection process. The European Par-

27 This decision-making system is very different from that which existed in the CESR, where decisions were

generally taken by the agreement of its members. Only in the event that an agreement could not be

reached would said decisions be taken by a qualified majority, with the correspondence between votes

of the members of the CESR and votes of the Member States provided in Article 238 (formerly Article 205,

sections 1 and 2 TCE) of the Treaty on the Functioning of the EU. See Article 14 of the Commission Deci-

sion of 23 January 2009 establishing the Committee of European Securities Regulators.


liament may object to his/her designation. Steven Maijoor (from the AFM)28 was recently elected as the first Chair of ESMA for a period of five years, with the ap-proval of the European Parliament.

The Chair is responsible for preparing the work of the Board of Supervisors and chairs both the meetings of this body and those of the Management Board. The Chair’s independence and objectivity is guaranteed by similar provisions to those applicable to the members of the Board of Supervisors and the Management Board.

3.3.4 Management body: the Executive Director

Management of ESMA is entrusted to an Executive Director, who is a full-time inde-pendent professional, appointed by the Board of Supervisors in an open selection process based on the merits of the candidates. The appointment requires prior con-firmation by the European Parliament. Verena Ross (FSA)29 was recently elected as the first Executive Director of ESMA for a period of five years.

The Executive Director prepares the work of the Management Board and is responsi-ble for executing the work programme of ESMA. He/she has the right to participate, without voting rights, in the meetings of the Board of Supervisors and the Manage-ment Board and is subject to similar independence and objectivity provisions as those provided for the members of the Board of Supervisors and the Management Board.

3.4 Legal remedies

Any natural or legal person, including the national supervisory authorities, may ap-peal the decisions of ESMA relating to breaches of EU law or its actions in an emer-gency situation and the binding resolution of disagreements between national su-pervisory authorities, as well as any other decision adopted by ESMA, in accordance with sectoral legislation, of which it is the addressee, or a decision which, although it appears to address another person, affects him/her directly and individually.

For this purpose, a Board of Appeal is established, conceived as a common body for ESMA, EBA and EIOPA, to deal with issues related with banking, insurance and securities. It is made up of six members and six alternates, who will be independent and impartial in exercising their functions. The Management Board of ESMA will appoint two members of the Board of Appeal and two alternates from a restricted list proposed by the Commission, for a term of five years (and the management boards of the EBA and EIOPA will do the same).

The decisions of the Board of Appeal will be adopted by a majority, as a minimum, of four of its six members, and when the appealed decision belongs to the field of application of Regulation 1095/2010, this majority must include at least one of the two members appointed by ESMA.

28 The Autoriteit Financiële Markten is the supervisory authority of the Netherlands.

29 The Financial Services Authority is the supervisory authority of the United Kingdom.


The period for presenting the appeal is two months from the notification date to the interested party or, failing that, from the date on which ESMA published its deci-sion. Filing of the appeal shall not have suspensive effect, but the Board of Appeal may suspend application of the appealed decision if it considers that the circum-stances require it.

The Board of Appeal may confirm the decision adopted by the competent Depart-ment of ESMA or it may submit the issue to said Department. This will be bound by the decision of the Board of Appeal and will adopt an amended resolution relating to the issue in question.

The resolutions of the Board of Appeal or, in the event that it does not intervene, of ESMA, may be appealed in the Court of Justice of the EU in accordance with Article 263 of the Treaty of Lisbon, both by the Member States and the institutions of the EU, and by any natural or legal person. It is also established that an action for a declaration of failure to act may be brought before the Court of Justice in accord-ance with Article 265 of the Treaty of Lisbon in the event that ESMA, being obliged to intervene, fails to take a decision.

4 Final reflections

The supervisory and regulatory system of the securities markets in Europe has been characterised until recently by a prevalence of local control over EU control. It has only been in the first decade of this century that the regulation and supervision of the securities market has been “impregnated” with Community harmonisation, mainly as a consequence of the development of the Financial Services Action Plan, published in 1999.

In the field of the supervision of securities markets, the creation of a new Euro-pean supervisory architecture as a response to the recent crisis which began in 2007 has meant that national supervisory authorities must coexist with the new European Securities and Markets Authority, which was created with a wide range of powers to develop draft technical standards, intervene by means of the mecha-nism for resolving disagreements and act directly on institutions and markets in emergency situations, which is going to involve a challenge with regard to coordi-nation and supervision and control actions of securities markets and their partici-pants.

The assumption by the European Union of greater responsibilities will have effects on the distribution of powers in this matter with the aim of achieving market unity and a single economic structure and planning which, in the case of securities mar-kets goes beyond national boundaries in favour of Community harmonisation and the single rulebook.

All of this will have an immediate reflection on Spanish legislation and it is possible that the mission to be fulfilled by the competent administrative authorities will vary, as well as the powers that they have had up to now to achieve the mandates en-trusted to them and which justify intervention in the financial market.

IV Legislative Annex


New legislation approved since publication of the CNMV bulletin for the second quarter of 2011, in chronological order, is as follows:

– Royal Decree 771/2011, of 3 June, which amends Royal Decree 216/2008, of 15 February, on Own Funds of Financial Institutions and Royal Decree 2606/1996, of 20 December, on Deposit Guarantee Funds of Credit Institutions.

This legislation implements the modifications related to the own funds of fi-nancial institutions introduced by Act 6/2011, of 6 April, by transposing Direc-tive 2009/111/EC, of 16 September 2009 (known as the Basel II Agreement). The main aspects of this legislation, which affects both credit institutions and investment service firms, are as follows:

– It introduces amendments relating to risk concentration.

– It improves the supervision of cross-border banking groups: it regulates the “colleges of supervisors” for the financial groups which operate in var-ious EU countries and clarifies the powers and responsibilities of the na-tional supervisory authorities, making their cooperation more effective.

– It improves regulation of the quality of banks’ own funds, especially relat-ing to “hybrid” instruments. For the purposes of solvency legislation, it distinguishes the instruments that do not rank pari passu with ordinary shares during liquidation or do not fully absorb losses on a going-concern basis pari passu with ordinary shares.

– It adapts liquidity risk management and improves risk management for securitised instruments. Firms which assign their assets in the securitisa-tion process must maintain part of the risks inherent to those assets, while companies which invest in the assets must show due diligence and acquire sufficient information. If they fail to do so, they will be subject to heavy capital penalties.

– It regulates the remuneration policy for employees and executives so that variable remuneration is to some extent related to the long-term results of the financial institutions. Similarly, it requires that staff undertake not to use personal hedging or insurance strategies relating to the remuneration and responsibility that reduces the affects of alignment with the risk in-cluded in their remuneration systems.

– Furthermore, in line with the provisions relating to deposit guarantee funds which are currently being carried out at a European level, it intro-duces a new regime for additional contributions to these funds based on the remuneration of the deposits. Specifically, it requires additional con-tributions from institutions which excessively remunerate both their term and sight deposits.

– Directive 2011/61/EU of the European Parliament and of the Council, of 8 June 2011, on Alternative Investment Fund Managers amending Directive 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010.

http://www.boe.es/boe/dias/2011/06/04/pdfs/BOE-A-2011-9731.pdf



148 Legislative Annex

The Directive establishes common requirements applicable to the authorisa-tion and supervision of alternative investment fund managers (hedge funds), which are those not subject to Directive 2009/65/EC, of 13 July (UCITS Direc-tive). It therefore establishes a harmonised framework for regulating and su-pervising the activities of all alternative fund managers in the EU, including those with their registered office outside the EU, establishing a passport sys-tem which allows cross-border activity in the EU. The Directive does not regu-late the alternative investment funds themselves, but their managers, and es-tablishes a period of two years for its transposition to national law.

In summary, it establishes the authorisation and registration regime, the rules of conduct and transparency of alternative fund managers, and the capital and organisational requirements. It should be highlighted that the legislation has a particular impact on remuneration policies, which must promote effective and responsible risk management. It also has an impact on the need to value assets reliably and objectively, the appointment of independent depositories, on the conditions for delegating functions, on the prevention of systemic risk deriv-ing from the leverage of these alternative investment funds, for which it pro-vides new instruments to ESMA and to the ESRB (European Systemic Risk Board), and the possible conflict-of-interest arising from the control of a com-pany (whether listed or not) by an alternative investment fund.

– CNMV Circular 2/2011, of 9 June, on Information of Foreign UCITS Regis-tered in the CNMV Registries.

As a result of the end of the period for transposing Directive 2009/65/EC of the European Parliament and of the Council (UCITS Directive), CNMV Circular 2/2006, of 27 June, is repealed and substituted, simplifying the notification procedure required of foreign collective investment schemes (CIS) which are going to be marketed in Spain and streamlining the information which must be sent to the CNMV about these CIS.

This notification procedure requires that CIS present the pertinent documenta-tion to the competent authority of the home Member State. The Circular estab-lishes a standardised model for the marketing report, since part of the informa-tion which must be provided in this notification procedure is not harmonised and refers to the provisions provided for marketing CIS in the host State.

Furthermore, it eliminates the requirements to register in the CNMV Registry of compartments, and it extends the content of the communication to be made to the CNMV in accordance with Article 52 of the Personal Income Tax Regula-tion so as to include the details of the compartments and/or classes referred to in the tax information. With regard to non-harmonised CIS, the requirement to send information by electronic means is cancelled.

– CNMV Circular 3/2011, of 9 June, which partially amends Circular 1/2009, of 4 February, on the Categories of Collective Investment Schemes based on their Investment Profile.

This Circular introduces some amendments relating to the categories of collec-tive investment schemes (CIS) based on their investment profile, which is





regulated in Circular 1/2009, of 4 February. Accordingly, it clarifies that the calculation of the investment percentages of fixed income and equity of the investment profiles will take into account both spot investments and deriva-tives, i.e. the fund’s total exposure. It also slightly amends the types of CIS and incorporates a harmonised EU-wide definition of monetary funds.

– Act 15/2011, of 16 June, amending certain Financial Rules for the application of Regulation (EC) No 1060/2009 of the European Parliament and of the Coun-cil, of 16 September 2009, on Credit Rating Agencies.

The approval of Regulation 1060/2009/EC on credit rating agencies makes it necessary to adapt the Securities Market Act 19/1992, of 7 July, on the Regime for Real Estate Investment Companies and Funds and on Mortgage Securitisa-tion Funds and Act 13/1985, of 25 May, on Investment Ratios, Own Funds and Reporting Obligations of Financial Intermediaries, specifying the obligation of certain financial institutions to use the ratings issued by registered or certified agencies pursuant to the Regulation.

The authority to supervise these entities, in accordance with the EU Regulation, lies with the European Securities and Markets Authority, but it also regulates the relations which that body must maintain with the CNMV in this matter.

– Royal Decree-Law 8/2011, of 1 July, on Support Measures for Mortgage Debt-ors, on Control of Public Spending and Cancellation of Debts with Companies and Self-Employed Persons Contracted by Local Entities, on Promotion of Business Activities and Fostering Administrative Restructuring and Simplifi-cation.

This Decree-Law adopts an extremely varied series of measures to strengthen the response capacity of the Spanish economy to the international financial crisis. Together with other fiscal measures or measures to speed up the process of creating companies, the following significant amendments to mortgage law are adopted, which have an indirect impact on the securities market:

– It extends the limit of the immunity from seizure of income up to 150% of the minimum inter-professional salary (Spanish acronym: SMI) for those mortgage debtors who have lost their first residence and an addi-tional 30% for each family member who does not receive income above the aforementioned SMI.

– In order to promote legal security in the real estate sector, the Property Register will now incorporate information that will allow purchasers of real estate to know in advance any possible litigation involving the prop-erty, including the proceedings which may involve the imposition of fines or future demolition.

– Act 21/2011, of 26 July, on Electronic Money.

This Act introduces amendments to the legislation on electronic money insti-tutions which had been introduced by Act 44/2002, of 22 November, on






http://www.normativafinanciera.com/normafin/normafin.nsf/normativa?Open&MN=MN6

150 Legislative Annex

Reform Measures for the Financial System, and its implementing legislation. It adapts the regulation of these institutions to Act 16/2009, of 13 November, on Payment Services, in some aspects such as the field of services to which the regulation on electronic money is not applicable. It also allows electronic cred-it institutions to provide payment services.

– Act 25/2011, of 1 August, on the partial reform of the Capital Companies Act and incorporation of Directive 2007/36/EC, of the European Parliament and of the Council, of 11 July 2007, on the Exercise of Certain Rights of Shareholders in Listed Companies.

The Act of partial reform of the Capital Companies Act and incorporation of Directive 2007/36/EC, of the European Parliament and of the Council, of 11 July, on the exercise of certain rights of shareholders in listed companies has a two-fold aim. Firstly, it aims to reduce the organisation and operating costs of capital companies and achieve the necessary modernisation of the law of these types of companies, as well as to remove some of the most unjustified differ-ences existing between the regime for sociedades anónimas (public limited companies) and that for sociedades de responsabilidad limitada (limited liabil-ity companies). Secondly, it obeys the need to transpose to national law Direc-tive 2007/36/EC, the essential purpose of which lies in facilitating and promot-ing the exercise of information and voting rights of the shareholders of listed companies within the EU.

With regard to reducing the costs of capital companies, the Act eliminates some requirements to place advertisements in the official or private press, es-pecially those relating to the calling of the General Shareholders’ Meeting, res-olutions for amending articles of association, publication of the dissolution of the company or the annual accounts during the liquidation period. It also es-tablishes measures which lower the cost of filing the annual accounts, reduc-ing the required paperwork.

For the first time by force of law, it regulates the legal regime of the legal en-tity director, with specific reference to the joint and several liability of the represented legal entity and the representative. Furthermore, it empowers di-rectors which represent at least one third of the Board of Directors to call a meeting when the Chairman, despite being required to do so, has not called a meeting.

Unification of the regime of public limited companies and limited liability companies occurs with regard to the calling of General Shareholders’ Meetings, the acceptance that the articles of association of public limited companies may establish, instead of a rigid structure of the management body, two or more types of organisation, the possibility of introducing into the articles causes for exclusion of shareholders, the consideration of inactivity as a cause for dissolv-ing all capital companies, the generalisation of the default rule on automatic conversion of the company’s directors in liquidators and the legal regime of the liquidators of cancelled companies. Similarly, in reference to the amend-ment of point 1 of Article 157 of the Capital Companies Act, failure to comply with the obligations or infringement of the prohibitions established in said






chapter by public limited companies and limited liability companies shall be considered a breach.

Furthermore, starting from the principle of equal treatment for shareholders which are in the same position with regard to information, participation and votes in the General Shareholders’ Meeting, a special regime is created for ex-ercising shareholders’ rights to participation in the General Shareholders’ Meeting of listed companies. It regulates in special detail the functioning of the General Shareholders’ Meeting, requiring that Extraordinary Meetings are called at least 15 days in advance. It also provides the possibility of sharehold-ers voting by electronic means, and regulates the advertising of the announce-ment and the complementary documentation, the right to complete this an-nouncement and to present new agreement proposals, as well as the shareholders’ right to information and participation, and distance voting in the General Shareholders’ Meeting.

Finally, it limits the set of rules contained in Title XIV of the Capital Compa-nies Act. Failure to comply with these rules will lead to the CNMV starting disciplinary proceedings. Similarly, it amends the Securities Market Act 24/1988, of 28 July, in such a way that the events of non-compliance included in Articles 516, 517, 520.2 and 524.2 of the consolidated text of the Capital Companies Act are now considered as serious breaches in accordance with the provisions in Article 100 of the Securities Market Act.

– Order EHA/2288/2011, of 2 August, which amends the Order of 19 May 1987, which implements Royal Decree 505/1987, of 3 April, which provides the crea-tion of a Book-Entry System of Government Debt.

This Order grants the possibility that other bodies of the Central Government, in addition to the Public Treasury and the General Treasury of the Social Secu-rity are recognised as holders of accounts in the Book-Entry System of Govern-ment Debt.

Accordingly, the public bodies of the Central Government other than the Pub-lic Treasury and the General Treasury of the Social Security, following the procedure established for acquiring the condition of account holder in their own name in the Book-Entry System of Government Debt, may carry out the operations which they deem necessary in the public book-entry debt market, without having to act through an intermediary or financial institution.




V Statistics Annex


1 Markets

1.1 Equity

Share issues and public offerings1 TABLE 1.1

2010 20112008 2009 2010 III IV I II III2

CASH VALUE3 (million euro)Total 16,349.3 11,390.7 16,012.7 2,322.6 8,333.3 3,237.0 4,797.6 6,321.8 Capital increases 16,339.7 11,388.7 15,407.0 2,322.6 8,262.0 3,237.0 4,797.6 6,321.8 Of which, primary offerings 292.0 17.3 958.7 6.0 14.2 0.0 3,696.4 8.4 With Spanish tranche 292.0 14.9 61.6 5.9 13.9 0.0 3,696.4 8.4 With international tranche 0.0 2.5 897.2 0.0 0.3 0.0 0.1 0.0 Secondary offerings 9.5 1.9 605.7 0.0 71.4 0.0 0.0 0.0 With Spanish tranche 9.5 1.9 79.1 0.0 71.4 0.0 0.0 0.0 With international tranche 0.0 0.0 526.7 0.0 0.0 0.0 0.0 0.0NOMINAL VALUE (million euro)Total 1,835.8 1,892.1 6,313.4 2,234.5 1,083.2 547.7 1,975.9 2,624.5 Capital increases 1,835.7 1,892.0 6,304.4 2,234.5 1,074.3 547.7 1,975.9 2,624.5 Of which, primary offerings 100.0 0.1 1.9 0.7 1.0 0.0 1,871.3 0.5 With Spanish tranche 100.0 0.1 1.8 0.7 0.9 0.0 1,871.3 0.5 With international tranche 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0 Secondary offerings 0.1 0.0 9.0 0.0 8.9 0.0 0.0 0.0 With Spanish tranche 0.1 0.0 8.9 0.0 8.9 0.0 0.0 0.0 With international tranche 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0NO. OF FILES4

Total 54 53 69 12 29 17 23 21 Capital increases 53 53 67 12 28 17 22 21 Of which, primary offerings 2 2 12 2 4 0 3 3 Of which, bonus issues 18 11 15 3 7 2 5 6 Secondary offerings 2 1 3 0 1 0 1 0NO. OF ISSUERS4

Total 39 34 46 10 23 13 16 18 Capital increases 38 34 45 10 22 13 15 18 Of which, primary offerings 2 2 12 2 4 0 3 3 Secondary offerings 2 1 2 0 1 0 1 01 Includes registered offerings with issuance prospectuses and listings admitted to trading without register issuance prospectuses. 2 Available data: August 2011.3 Does not include registered amounts that were not carried out.4 Includes all registered offerings, including the issues that were not carried out.

Primary and secondary offerings. By type of subscriber TABLE 1.2

2010 2011Million euro 2008 2009 2010 III IV I II III1

PRIMARY OFFERINGSTotal 292.0 17.3 958.7 6.0 14.2 0.0 3,696.4 8.4 Spanish tranche 282.0 14.9 61.6 5.9 13.9 0.0 3,684.9 8.4 Private subscribers 191.5 0.0 2.5 2.5 0.0 0.0 2,203.9 2.3 Institutional subscribers 90.5 14.9 59.0 3.4 13.9 0.0 1,481.0 6.0 International tranche 0.0 2.5 897.2 0.0 0.3 0.0 0.1 0.0 Employees 10.0 0.0 0.0 0.0 0.0 0.0 11.4 0.0 Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0SECONDARY OFFERINGSTotal 9.5 1.9 605.7 0.0 71.4 0.0 0.0 0.0 Spanish tranche 9.5 1.5 79.1 0.0 71.4 0.0 0.0 0.0 Private subscribers 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Institutional subscribers 9.5 1.5 79.1 0.0 71.4 0.0 0.0 0.0 International tranche 0.0 0.0 526.7 0.0 0.0 0.0 0.0 0.0 Employees 0.0 0.4 0.0 0.0 0.0 0.0 0.0 0.0 Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.01 Available data: August 2011.

156 Statistics Annex

Companies listed1 TABLE 1.3

2010 2011

2008 2009 2010 III IV I II III2

Total electronic market3 136 133 129 129 129 130 130 130

Of which, without Nuevo Mercado 136 133 129 129 129 130 130 130

Of which, Nuevo Mercado 0 0 0 0 0 0 0 0

Of which, foreign companies 5 5 6 5 6 7 7 7

Second Market 8 7 6 6 6 6 6 6

Madrid 2 2 2 2 2 2 2 2

Barcelona 6 5 4 4 4 4 4 4

Bilbao 0 0 0 0 0 0 0 0

Valencia 0 0 0 0 0 0 0 0

Open outcry ex SICAVs 29 29 28 28 28 28 28 28

Madrid 13 13 13 13 13 13 13 13

Barcelona 19 19 18 18 18 18 18 18

Bilbao 8 8 8 8 8 8 8 8

Valencia 7 6 6 6 6 6 6 6

Open outcry SICAVs 3 1 1 1 1 1 1 1

MAB4 3,347 3,251 3,144 3,175 3,144 3,121 3,091 3,083

Latibex 35 32 29 31 29 29 29 29

1 Data at the end of period.2 Available data: August 2011.3 Without ETFs (Exchange Traded Funds).4 Alternative Stock Market.

Capitalisation1 TABLE 1.4

2010 2011

Million euro 2008 2009 2010 III IV I II III2

Total electronic market3 531,194.2 634,762.8 590,182.8 568,142.8 565,585.2 619,538.0 609,135.8 503,669.4

Of which, without Nuevo Mercado 531,194.2 634,762.8 590,182.8 568,142.8 565,585.2 619,538.0 609,135.8 503,669.4

Of which, Nuevo Mercado 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Of which, foreign companies4 61,317.5 94,954.0 92,275.8 83,898.4 100,249.8 104,571.0 103,403.8 79,323.3

Ibex 35 322,806.6 404,997.3 376,747.6 364,914.0 348,998.9 385,136.5 382,731.8 320,157.0

Second Market 109.9 80.9 69.1 74.9 74.6 59.4 57.5 58.8

Madrid 22.8 24.9 23.4 26.4 24.7 25.5 23.6 24.9

Barcelona 87.1 56.0 45.7 48.5 49.9 33.9 33.9 33.9

Bilbao 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Valencia 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Open outcry ex SICAVs 5,340.7 4,226.5 4,159.1 3,859.2 4,128.2 3,980.3 3,835.4 3,686.7

Madrid 1,454.7 997.3 958.0 924.0 878.8 873.3 841.7 814.0

Barcelona 3,580.2 3,400.6 3,336.4 3,139.2 3,432.2 3,325.1 3,187.2 3,077.9

Bilbao 45.9 435.4 433.4 386.9 362.1 322.4 321.2 316.9

Valencia 760.4 559.2 554.8 475.2 458.7 426.4 423.6 370.4

Open outcry SICAVs5 126.8 28.5 28.1 30.9 32.6 33.0 36.1 36.2

MAB5,6 24,718.6 26,282.9 26,502.4 26,046.2 26,340.8 26,581.5 26,043.0 24,248.7

Latibex 210,773.5 412,628.9 437,016.7 408,834.8 435,337.8 425,895.7 452,926.3 404,800.3

1 Data at the end of period.2 Available data: August 2011.3 Without ETFs (Exchange Traded Funds).4 Foreign companies capitalisation includes their entire shares, whether they are deposited in Spain or not.5 It is only calculated with outstanding shares, but not with treasury shares, because they only report the capital stock at the end of the year.6 Alternative Stock Market.


Trading TABLE 1.5

2010 2011


Total electronic market2 1,228,392.4 877,073.5 1,026,478.5 213,520.2 291,987.6 244,908.3 236,325.4 173,997.0

Of which, without Nuevo Mercado 1,228,380.9 877,073.5 1,026,478.5 213,520.2 291,987.6 244,908.3 236,325.4 173,997.0

Of which, Nuevo Mercado 11.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Of which, foreign companies 1,407.1 4,750.4 6.415.3 1,158.2 1,258.6 1,379.9 1,056.0 757.9

Second Market 31.7 3.2 3.0 0.5 1.4 0.8 0.3 0.1

Madrid 3.4 2.0 2.8 0.5 1.3 0.5 0.1 0.1

Barcelona 28.3 1.2 0.3 0.0 0.0 0.3 0.2 0.0

Bilbao 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Valencia 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Open outcry ex SICAVs 182.1 52.8 157.2 53.1 81.2 18.1 7.5 2.1

Madrid 73.9 16.5 15.7 8.6 1.5 4.5 1.8 0.6

Barcelona 103.6 29.4 135.7 44.4 78.0 13.5 5.6 1.4

Bilbao 0.1 1.1 3.9 0.0 0.0 0.0 0.0 0.0

Valencia 4.5 5.9 1.9 0.1 1.7 0.1 0.1 0.0

Open outcry SICAVs 25.3 19.7 8.1 0.5 0.5 1.7 3.0 0.8

MAB3 7,060.3 5,080.1 4,147.9 768.4 1,146.9 879.6 1,134.0 851.3

Latibex 757.7 434.7 521.2 93.5 119.2 102.3 89.4 60.5

1 Available data: August 2011.2 Without ETFs (Exchange Traded Funds).3 Alternative Stock Market.

Trading on the electronic market by type of transaction1 TABLE 1.6

2010 2011


Regular trading 1,180,835.9 833,854.9 983,584.5 202,084.6 280,656.0 235,958.6 225,422.9 161,896.0

Orders 774,718.1 499,182.8 541,879.8 112,273.3 131,954.9 153,546.1 119,669.8 95,091.6

Put-throughs 105,673.9 51,335.8 58,678.1 12,924.2 15,505.2 22,522.2 13,555.7 12,780.9

Block trades 300,443.9 283,336.3 383,026.6 76,887.0 133,196.0 59,890.3 92,197.4 54,023.5

Off-hours 10,175.2 5,996.6 17,209.5 4,932.9 3,064.3 2,096.0 2,645.6 2,016.0

Authorised trades 3,183.2 4,695.6 2,660.5 200.2 1,025.8 843.3 676.6 1,116.7

Art. 36.1 SML trades 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Tender offers 17,461.2 7,188.9 312.0 38.8 0.0 0.0 233.8 3,983.1

Public offerings for sale 292.0 1,325.0 1,448.2 0.0 0.0 0.0 0.0 3,922.1

Declared trades 1,066.8 5,202.6 2,273.4 2,272.7 0.0 0.0 2,171.6 0.0

Options 9,661.9 11,443.2 11,474.7 2,010.5 5,235.2 3,501.6 2,717.4 245.7

Hedge transactions 5,716.3 7,366.7 7,515.8 1,980.4 2,006.3 2,508.7 2,457.5 817.5

1 Without ETFs (Exchange Traded Funds).2 Available data: August 2011.

Margin trading for sales and securities lending TABLE 1.7

2010 2011


TRADING

Securities lending2 583,950.8 471,007.1 556,246.7 123,594.7 154,640.3 108,561.1 142,262.8 96,636.9

Margin trading for sales of securities3 624.9 704.3 598.0 155.6 130.1 212.3 112.9 70.8

Margin trading for securities purchases3 154.7 106.4 65.9 12.9 16.9 19.8 11.4 11.2

OUTSTANDING BALANCE

Securities lending2 43,647.8 47,322.2 36,195.9 37,101.6 36,195.9 39,779.8 39,553.6 33,100.1

Margin trading for sales of securities3 20.7 21.1 9.9 19.1 9.9 17.6 12.7 7.8

Margin trading for securities purchases3 7.0 5.6 5.0 3.4 5.0 4.5 5.2 4.7

1 Available data: August 2011.2 Regulated by Article 36.7 of the Securities Market Law and Order ECO/764/2004.3 Transactions performed in accordance with Ministerial Order dated 25 March 1991 on the margin system in spot transactions.


1.2 Fixed-income

Gross issues registered1 at the CNMV TABLE 1.8

2010 20112008 2009 2010 III IV I II III2

NO. OF ISSUERSTotal 179 168 115 33 47 43 42 24 Mortgage covered bonds 19 27 25 13 13 14 15 6 Territorial covered bonds 7 1 6 1 1 2 4 2 Non-convertible bonds and debentures 30 50 39 11 11 10 12 5 Convertible bonds and debentures 1 3 2 0 2 3 1 0 Backed securities 88 68 36 7 15 8 9 6 Commercial paper 77 69 58 9 19 15 12 6 Of which, asset-backed 2 2 2 0 1 0 1 0 Of which, non-asset-backed 75 67 56 9 18 15 11 6 Other fixed-income issues 0 0 0 0 0 0 0 0 Preference shares 8 23 0 0 0 1 0 0NO. OF ISSUESTotal 337 512 349 60 98 88 82 39 Mortgage covered bonds 47 75 88 24 21 32 29 7 Territorial covered bonds 8 1 9 1 2 4 4 10 Non-convertible bonds and debentures 76 244 154 19 38 19 27 10 Convertible bonds and debentures 1 6 3 0 3 6 1 0 Backed securities 108 76 36 7 15 10 9 6 Commercial paper 88 73 59 9 19 15 12 6 Of which, asset-backed 2 2 2 0 1 0 1 0 Of which, non-asset-backed 86 71 57 9 18 15 11 6 Other fixed-income issues 0 0 0 0 0 0 0 0 Preference shares 9 37 0 0 0 2 0 0NOMINAL AMOUNT (million euro)Total 476,275.7 387,475.8 226,448.9 61,634.8 55,736.9 77,161.3 59,900.0 19,684.4 Mortgage covered bonds 14,300.0 35,573.9 34,378.5 10,317.0 8,519.1 19,254.0 18,980.0 2,250.0 Territorial covered bonds 1,820.0 500.0 5,900.0 300.0 500.0 2,935.0 1,800.0 2,664.2 Non-convertible bonds and debentures 10,489.6 62,249.0 24,356.0 1,287.2 7,524.7 2,578.1 3,320.2 407.6 Convertible bonds and debentures 1,429.1 3,200.0 968.0 0.0 968.0 681.6 1,500.0 0.0 Backed securities 135,252.5 81,651.2 63,260.5 28,189.7 16,497.3 26,585.0 11,168.4 6,159.3 Spanish tranche 132,730.1 77,289.4 62,743.0 28,189.7 16,473.3 23,706.2 10,130.0 6,159.3 International tranche 2,522.4 4,361.9 517.5 0.0 24.0 2,878.8 1,038.4 0.0 Commercial paper3 311,738.5 191,341.7 97,586.0 21,540.9 21,727.9 24,927.6 23,131.3 8,203.3 Of which, asset-backed 2,843.1 4,758.4 5,057.0 1,723.0 1,409.0 546.0 913.0 84.0 Of which, non-asset-backed 308,895.4 186,583.3 92,529.0 19,817.9 20,318.9 24,381.6 22,218.3 8,119.3 Other fixed-income issues 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Preference shares 1,246.0 12,960.0 0.0 0.0 0.0 200.0 0.0 0.0Pro memoria: Subordinated issues 12,949.5 20,988.5 9,154.2 1,838.5 2,048.2 5,407.9 2,696.5 1,640.0Underwritten issues 9,169.5 4,793.8 299.0 0.0 0.0 10.0 0.0 0.01 Includes issuance and trading prospectuses.2 Available data: August 2011.3 The figures for commercial paper refer to the amount placed in the year.

Issues admitted to trading on AIAF TABLE 1.9

2010 2011Nominal amount in million euro 2008 2009 2010 III IV I II III1

Total 476,710.4 388,455.0 223,404.5 65,590.3 48,230.5 70,790.8 68,289.8 26,343.6 Commercial paper 314,417.4 191,427.7 99,784.4 22,148.0 21,521.8 25,096.2 23,094.5 9,437.0 Bonds and debentures 10,040.3 61,862.5 24,728.6 1,541.1 7,512.4 2,080.6 3,616.9 585.5 Mortgage covered bonds 14,150.0 35,568.9 32,861.0 9,767.0 8,499.1 17,244.0 21,435.0 3,425.0 Territorial covered bonds 1,930.0 500.0 5,900.0 300.0 500.0 2,935.0 300.0 4,164.2 Backed securities 135,926.6 85,542.9 60,030.5 31,834.2 10,197.3 23,235.0 19,843.4 8,731.9 Preference shares 246.0 13,552.9 100.0 0.0 0.0 200.0 0.0 0.0 Matador bonds 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.01 Available data: August 2011.


AIAF. Issuers, issues and outstanding balance TABLE 1.10

2010 20112008 2009 2010 III IV I II III1

NO. OF ISSUERSTotal 556 614 634 628 634 631 613 609 Commercial paper 72 67 60 66 60 56 46 47 Bonds and debentures 93 91 93 91 93 91 93 93 Mortgage covered bonds 22 29 33 31 33 35 36 38 Territorial covered bonds 11 11 12 11 12 12 12 12 Backed securities 383 442 459 454 459 458 441 436 Preference shares 52 60 59 59 59 60 60 60 Matador bonds 12 12 12 12 12 12 12 12NO. OF ISSUESTotal 4,639 4,084 3,630 3,646 3,630 3,570 3,454 3,439 Commercial paper 2,489 1,507 958 999 958 911 851 838 Bonds and debentures 450 611 645 639 645 631 627 631 Mortgage covered bonds 146 202 253 239 253 267 277 282 Territorial covered bonds 26 25 26 25 26 28 29 38 Backed securities 1,436 1,629 1,641 1,637 1,641 1,625 1,562 1,542 Preference shares 78 96 93 93 93 94 94 94 Matador bonds 14 14 14 14 14 14 14 14OUTSTANDING BALANCE2 (million euro)Total 819,637.7 870,981.1 850,181.7 851,730.8 850,181.7 854,735.5 849,569.3 851,056.2 Commercial paper 71,762.2 41,647.0 23,233.6 27,299.7 23,233.6 24,274.6 22,123.1 21,667.1 Bonds and debentures 122,001.9 150,886.3 146,077.7 144,437.2 146,077.7 139,744.8 136,241.1 133,151.7 Mortgage covered bonds 162,465.5 185,343.8 195,734.8 189,145.7 195,734.8 202,528.8 219,313.8 222,488.8 Territorial covered bonds 17,030.0 16,030.0 18,350.0 18,650.0 18,350.0 20,485.0 20,285.0 24,149.2 Backed securities 422,010.7 442,831.5 434,835.1 440,244.9 434,835.1 435,551.9 419,458.0 417,451.1 Preference shares 23,308.6 33,183.8 30,891.8 30,894.5 30,891.8 31,091.8 31,089.6 31,089.6 Matador bonds 1,058.8 1,058.8 1,058.8 1,058.8 1,058.8 1,058.8 1,058.8 1,058.81 Available data: August 2011.2 Nominal amount.

AIAF. Trading TABLE 1.11

Nominal amount in million euro

2010 20112008 2009 2010 III IV I II III1

BY TYPE OF ASSETTotal 2,521,040.1 4,658,633.2 4,383,118.7 1,088,985.4 1,811,416.3 2,540,940.4 1,618,996.9 1,203,982.8 Commercial paper 591,943.8 533,331.0 385,238.9 92,307.2 72,604.4 67,260.3 57,492.7 30,998.6 Bonds and debentures 80,573.8 321,743.0 922,393.1 192,302.0 349,527.2 241,674.3 96,130.6 64,047.4 Mortgage covered bonds 129,995.3 263,150.0 271,441.8 86,114.0 96,608.6 169,889.3 115,484.5 69,918.8 Territorial covered bonds 10,142.3 7,209.0 14,458.2 3,213.7 1,924.7 32,764.3 43,117.1 51,669.9 Backed securities 1,704,341.8 3,527,486.4 2,784,775.4 714,081.4 1,289,446.1 2,028,138.1 1,303,425.0 986,470.7 Preference shares 4,030.0 5,668.5 4,635.7 966.9 1,273.8 1,178.3 3,337.6 842.1 Matador bonds 13.2 45.2 175.7 0.2 31.6 35.9 9.5 35.4BY TYPE OF TRANSACTIONTotal 2,521,040.1 4,658,633.2 4,383,118.7 1,088,985.4 1,811,416.3 2,540,940.4 1,618,996.9 1,203,982.8 Outright 387,897.1 378,348.4 288,927.3 55,230.8 69,161.4 100,126.8 78,598.4 35,316.5 Repos 381,505.0 362,068.7 304,493.2 72,123.5 61,165.8 55,980.9 51,485.2 30,796.6 Sell-buybacks/Buy-sellbacks 1,751,638.0 3,918,216.1 3,789,698.3 961,631.2 1,681,089.0 2,384,832.7 1,488,913.3 1,137,869.71 Available data: August 2011.

AIAF. Third-party trading. By purchaser sector TABLE 1.12

Nominal amount in million euro

2010 2011 2008 2009 2010 III IV I II III1

Total 744,652.5 681,946.6 553,896.6 121,757.2 120,800.2 136,405.9 120,560.2 62,055.2 Non-financial companies 285,044.4 256,224.6 162,949.5 37,846.5 33,281.8 36,362.7 37,287.8 21,335.9 Financial institutions 334,851.6 298,909.1 289,950.4 68,828.4 67,718.0 67,797.2 55,419.8 29,935.0 Credit institutions 130,056.0 125,547.5 102,372.1 21,916.4 29,970.9 34,359.6 27,624.9 13,393.8 IICs2, insurance and pension funds 154,709.8 115,865.3 125,899.4 31,339.1 22,618.2 24,511.6 25,796.8 15,969.7 Other financial institutions 50,085.8 57,496.3 61,678.9 15,572.8 15,128.9 8,926.0 1,998.1 571.4 General government 6,331.2 5,808.5 3,117.7 160.5 309.8 295.8 392.8 470.5 Households and NPISHs3 13,344.0 14,647.8 14,244.4 2,234.1 2,541.9 1,866.8 2,817.3 1,242.0 Rest of the world 105,081.2 106,356.6 83,634.6 12,687.8 16,948.7 30,083.5 24,642.5 9,071.81 Available data: August 2011.2 IICs: Instituciones de Inversión Colectiva / CIS: Collective Investment Schemes.3 Non-profit institutions serving households.


Issues admitted to trading on equity markets1 TABLE 1.13

2010 20112008 2009 2010 III IV I II III2

NOMINAL AMOUNTS (million euro)Total 3,390.6 5,866.8 868.0 0.0 468.0 500.0 681.6 1,500.0 Non-convertible bonds and debentures 0.0 0.0 400.0 0.0 0.0 0.0 0.0 0.0 Convertible bonds and debentures 0.0 4,510.8 468.0 0.0 468.0 500.0 681.6 1,500.0 Backed securities 3,390.6 1,356.0 0.0 0.0 0.0 0.0 0.0 0.0 Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0NO. OF ISSUESTotal 33 10 8 0 1 1 4 1 Non-convertible bonds and debentures 0 0 7 0 0 0 0 0 Convertible bonds and debentures 0 4 1 0 1 1 4 1 Backed securities 33 6 0 0 0 0 0 0 Others 0 0 0 0 0 0 0 0

1 Private issuers. Includes issuance and trading prospectuses.2 Available data: August 2011.

Equity markets. Issuers, issues and outstanding balances TABLE 1.14

2010 20112008 2009 2010 III IV I II III1

NO. OF ISSUERSTotal 58 62 60 62 60 57 59 59 Private issuers 45 48 46 48 46 44 46 46 Non-financial companies 5 6 5 5 5 4 4 4 Financial institutions 40 42 41 43 41 40 42 42 General government2 13 14 14 14 14 13 13 13 Regional governments 3 3 3 3 3 3 3 3NO. OF ISSUESTotal 271 269 247 257 247 237 245 244 Private issuers 157 155 145 150 145 137 137 136 Non-financial companies 9 10 7 8 7 7 7 7 Financial institutions 148 145 138 142 138 130 130 129 General government2 114 114 102 107 102 100 108 108 Regional governments 82 76 64 68 64 63 72 73OUTSTANDING BALANCES3 (million euro)Total 29,142.6 36,299.5 41,091.3 36,480.1 41,091.3 41,497.4 45,280.8 44,190.2 Private issuers 17,237.9 21,600.9 19,261.5 19,110.1 19,261.5 19,301.5 19,017.9 18,309.6 Non-financial companies 381.0 1,783.7 376.6 377.1 376.6 375.8 375.8 375.8 Financial institutions 16,856.9 19,817.2 18,884.8 18,733.0 18,884.8 18,925.7 18,642.1 17,933.8 General government2 11,904.7 14,698.6 21,829.9 17,370.0 21,829.9 22,195.9 26,262.9 25,880.6 Regional governments 9,972.5 12,338.3 19,442.4 14,961.8 19,442.4 19,812.5 23,992.9 23,710.6

1 Available data: August 2011.2 Without public book-entry debt.3 Nominal amount.

Trading on equity markets TABLE 1.15

Nominal amounts in million euro2010 2011

2008 2009 2010 III IV I II III1

Electronic market 1,580.1 633.0 510.5 97.1 122.5 81.5 100.5 50.4Open outcry 7,842.1 4,008.4 7,525.6 1,117.8 4,674.4 2,413.6 582.7 405.3 Madrid 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Barcelona 7,674.9 3,821.1 7,146.7 1,051.6 4,620.6 2,379.4 578.6 398.2 Bilbao 6.1 4.6 2.3 0.4 0.5 0.2 0.1 0.1 Valencia 161.1 182.7 376.6 65.8 53.4 34.0 3.9 7.0Public book-entry debt 46.2 49.1 331.1 6.3 9.1 4.4 187.8 274.2Regional governments debt 71,054.9 70,065.8 59,017.0 13,613.0 13,336.2 11,806.8 16,842.8 9,660.9

1 Available data: August 2011.


Organised trading systems: SENAF y MTS. Public debt trading by type TABLE 1.16

2010 2011Nominal amounts in million euro 2008 2009 2010 III IV I II III1

Total 132,327.4 202,120.5 265,966.0 75,677.6 41,660.2 27,593.2 28,318.9 10,154.0 Outright 89,010.5 114,314.0 110,011.0 16,173.0 21,116.0 27,293.0 26,482.0 10,154.0 Sell-buybacks/Buy-sellbacks 43,316.9 86,806.5 155,433.0 59,504.6 20,394.2 300.2 1,836.9 0.0 Others 0.0 1,000.0 522.0 0.0 150.0 0.0 0.0 0.01 Available data: August 2011.

1.3 Derivatives and other products

1.3.1 Financial derivatives markets: MEFF

Trading on MEFF TABLE 1.17

2010 2011Number of contracts 2008 2009 2010 III IV I II III1

Debt products 12 18 14 4 2 6 4 0 Debt futures2 12 18 14 4 2 6 4 0Ibex 35 products3,4 8,433,963 6,187,544 6,946,167 1,446,089 1,585,302 1,714,038 1,403,188 1,172,177 Ibex 35 plus futures 7,275,299 5,436,989 6,280,999 1,327,272 1,432,956 1,575,272 1,280,699 1,065,471 Ibex 35 mini futures 330,042 314,829 357,926 69,900 72,265 90,048 72,265 68,769 Call mini options 323,874 230,349 122,158 21,602 30,717 17,606 19,733 16,328 Put mini options 504,749 205,377 185,083 27,315 49,364 31,111 30,491 21,609Stock products5 64,554,817 80,114,693 57,291,482 13,107,040 17,395,281 16,374,082 10,805,253 3,114,196 Futures 46,237,568 44,586,779 19,684,108 4,969,808 6,650,855 8,006,039 5,337,121 1,348,379 Call options 7,809,423 18,864,840 17,186,515 4,413,718 4,250,315 3,761,646 2,026,429 722,555 Put options 10,507,826 16,663,074 20,420,859 3,723,514 6,494,111 4,606,397 3,441,703 1,043,262Pro-memoria: MEFF trading on EurexDebt products6 869,105 558,848 373,113 59,521 71,884 90,405 75,174 32,834Index products7 1,169,059 835,159 604,029 101,741 124,415 106,551 96,795 76,8371 Available data: August 2011.2 Contract size: 100 thousand euros. 3 The number of Ibex 35 mini futures (multiples of 1 euro) was standardised to the size of the Ibex 35 plus futures (multiples of 10 euro). 4 Contract size: Ibex 35, 10 euros. 5 Contract size: 100 Stocks. 6 Bund, Bobl and Schatz futures. 7 Dax 30, DJ EuroStoxx 50 and DJ Stoxx 50 futures.

1.3.2 Warrants, option buying and selling contracts, and ETF (Exchange Traded Funds)

Issues registered at the CNMV TABLE 1.18

2010 20112008 2009 2010 III IV I II III1

WARRANTS2

Premium amount (million euro) 12,234.4 5,165.1 4,915.3 761.4 1,227.4 1,174.6 891.4 1,414.9 On stocks 6,914.1 2,607.1 2,537.4 302.5 705.7 666.8 462.2 754.3 On indexes 4,542.8 2,000.1 1,852.6 367.3 380.8 387.8 293.9 480.9 Other underlyings3 777.5 558.0 525.4 91.6 140.9 120.0 135.2 179.7Number of issues 9,790 7,342 8,375 1,260 2,534 1,946 1,842 2,182Number of issuers 8 9 9 6 7 7 6 6OPTION BUYING AND SELLING CONTRACTSNominal amounts (million euro) 77.0 35.0 64.0 20.0 7.0 0.0 0.0 0.0 On stocks 77.0 25.0 47.0 10.0 7.0 0.0 0.0 0.0 On indexes 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other underlyings3 0.0 10.0 17.0 10.0 0.0 0.0 0.0 0.0Number of issues 4 3 7 2 1 0 0 0Number of issuers 1 1 1 1 1 0 0 01 Available data: August 2011.2 Includes issuance and trading prospectuses.3 Includes the following underlying: baskets of stocks, exchange rates, interest rates and commodities.


Equity markets. Warrants and ETF trading TABLE 1.19

2010 2011

2008 2009 2010 III IV I II III1

WARRANTS

Trading (million euro) 2,943.7 1,768.4 1,603.2 397.9 366.2 466.4 286.0 303.0

On Spanish stocks 1,581.9 809.9 759.8 198.0 181.1 212.5 129.8 114.7

On foreign stocks 145.7 97.6 60.7 8.4 17.2 23.7 15.3 15.6

On indexes 1,063.3 761.2 689.5 169.2 130.8 157.1 75.3 97.8

Other underlyings2 152.8 99.7 93.2 22.4 37.1 73.1 65.6 75

Number of issues3 9,770 8,038 7,750 3,007 3,060 2,746 3,038 2,822

Number of issuers3 10 10 10 9 10 9 9 9

CERTIFICATES

Trading (million euro) 16.8 39.2 22 7.8 3.7 4.1 9.3 24.6

Number of issues3 26 22 16 13 13 11 10 7

Number of issuers3 4 4 2 2 2 2 2 2

ETF

Trading (million euro) 6,938.1 3,470.6 6,229.7 746.4 831.3 1,081.7 571.1 787.9

Number of funds 30 32 65 43 65 67 67 67

Assets4 (million euro) 1,630.3 1,648.4 827.8 960.2 827.8 859.4 867.3 n.a.

1 Available data: August 2011.2 Includes the following underlying: baskets of stocks, exchange rates, interest rates and commodities.3 Issues or issuers which were traded in each period.4 Assets from national ETF is only included because assets from foreign ones are not available.n.a.: No available data.

1.3.3 Non-financial derivatives

Trading on MFAO1 TABLE 1.20

2010 2011

Number of contracts 2008 2009 2010 III IV I II III2

On olive oil

Extra-virgin olive oil futures3 48,091 135,705 165,840 41,555 25,050 23,120 16,401 5,151

1 Olive oil futures market.2 Available data: August 2011.3 Nominal amount of the contract: 1,000 kg.


2 Investment services

Investment services. Spanish firms, branches and agents TABLE 2.1

2010 20112008 2009 2010 III IV I II III1

BROKER-DEALERSSpanish firms 51 50 50 51 50 50 50 50Branches 79 78 80 79 80 80 79 76Agents 6,041 6,102 6,455 6,387 6,455 6,560 6,518 6,545BROKERSSpanish firms 50 50 47 47 47 45 45 45Branches 9 9 10 8 10 13 13 12Agents 639 638 665 660 665 689 652 652PORTFOLIO MANAGEMENT COMPANIESSpanish firms 10 9 7 8 7 6 6 6Branches 4 5 5 5 5 5 5 5Agents 6 5 3 4 3 2 2 3FINANCIAL ADVISORY FIRMS2

Spanish firms – 16 48 42 48 58 64 73CREDIT INSTITUTIONS3

Spanish firms 195 193 186 189 186 186 189 1911 Available data: August 2011.2 Investment services company created by Law 47/2008 of 19 December, which modifies Law 24/1988 of 28 July on the Securities Market, and regulated by Circular

CR CNMV 10/2008 of 30 December.3 Source: Banco de España.

Investment services. Foreign firms TABLE 2.2

2010 20112008 2009 2010 III IV I II III1

Total 2,232 2,346 2,604 2,563 2,604 2,671 2,743 2,784 European Economic Area investment services firms 1,818 1,940 2,176 2,129 2,176 2,238 2,303 2,344 Branches 37 36 41 40 41 40 40 40 Free provision of services 1,781 1,904 2,135 2,089 2,135 2,198 2,263 2,304 Credit institutions2 414 424 428 434 428 433 440 440 From EU member states 405 414 418 424 418 423 430 430 Branches 56 53 53 56 53 55 56 55 Free provision of services 348 360 364 367 364 368 374 375 Subsidiaries of free provision of services institutions 1 1 1 1 1 0 0 0 From non-EU states 9 10 10 10 10 10 10 10 Branches 8 8 8 8 8 8 8 8 Free provision of services 1 2 2 2 2 2 2 21 Available data: August 2011.2 Source: Banco de España and CNMV.

Intermediation of spot transactions1 TABLE 2.3

II 2010 II 2011

Million euro

Spanish organised

markets

Other Spanish markets

Foreign markets Total

Spanish organised

markets

Other Spanish markets

Foreign markets Total

FIXED-INCOMETotal 776,688 2,687,669 124,424 3,588,781 777,958 2,414,999 216,945 3,409,902 Broker-dealers 146,195 811,964 42,032 1,000,191 111,850 675,987 170,888 958,725 Brokers 630,493 1,875,705 82,392 2,588,590 666,108 1,739,012 46,057 2,451,177EQUITYTotal 298,855 1,310 27,329 327,494 237,168 965 19,442 257,575 Broker-dealers 293,039 1,119 26,120 320,278 232,609 817 18,235 251,661 Brokers 5,816 191 1,209 7,216 4,559 148 1,207 5,9141 Period accumulated data. Quarterly.


Intermediation of derivative transactions1,2 TABLE 2.4

II 2010 II 2011

Million euro

Spanish organised

markets

Foreign organised

markets

Non-organised

markets Total

Spanish organised

markets

Foreign organised

markets

Non-organised

markets Total

Total 1,263,917 2,501,023 786,422 4,551,362 806,521 2,634,116 152,643 3,593,280

Broker-dealers 1,255,305 2,056,111 636,811 3,948,227 804,187 1,474,841 90,058 2,369,086

Brokers 8,612 444,912 149,611 603,135 2,334 1,159,275 62,585 1,224,194

1 The amount of the buy and sell transactions of financial assets, financial futures on values and interest rates, and other transactions on interest rates will be the se-curities nominal or notional value or the principal to which the contract reaches. The amount of the transactions on options will be the strike price of the underlying asset multiplied by the number of instruments committed.

2 Period accumulated data. Quarterly.

Portfolio management. Number of portfolios and assets under management1 TABLE 2.5

II 2010 II 2011

IIC2 Other3 Total IIC2 Other3 Total

NUMBER OF PORTFOLIOS

Total 159 13,100 13,259 134 14,128 14,262

Broker-dealers 85 7,555 7,640 87 7,032 7,119

Brokers 51 3,231 3,282 42 3,661 3,703

Portfolio management companies 23 2,314 2,337 5 3,435 3,440

ASSETS UNDER MANAGEMENT (thousand euro)

Total 2,122,271 7,938,523 10,060,795 1,693,067 7,967,760 9,660,829

Broker-dealers 909,965 3,217,426 4,127,391 957,375 3,276,545 4,233,922

Brokers 1,039,573 1,342,372 2,381,946 627,525 1,651,721 2,279,246

Portfolio management companies 172,733 3,378,725 3,551,458 108,167 3,039,494 3,147,661

1 Data at the end of period. Quarterly.2 IIC: Instituciones de Inversión Colectiva / CIS: Collective Investment Schemes. Includes both resident and non resident IICs management.3 Includes the rest of clients, both covered and not covered by the Investment Guarantee Fund, an investor compensation scheme regulated by Royal Decree

948/2001.

Financial advice. Number of contracts and assets advised1 TABLE 2.6

II 2010 II 2011

Retail clientsProfessional

clients Total2 Retail clientsProfessional

clients Total2

NUMBER OF CONTRACTS

Total 5,088 71 5,163 7,400 102 7,519

Broker-dealers 1,203 5 1,211 1,485 2 1,492

Brokers 3,153 55 3,209 4,773 93 4,878

Portfolio management companies 732 11 743 1,142 7 1,149

ASSETS ADVISED (thousand euro)

Total 2,179,095 4,160,382 6,720,000 3,011,362 4,436,334 7,924,222

Broker-dealers 537,441 220,779 1,138,712 514,319 35,050 951,344

Brokers 1,273,260 862,871 2,136,162 1,953,461 995,592 3,023,604

Portfolio management companies 368,394 3,076,732 3,445,126 543,582 3,405,692 3,949,274

1 Data at the end of period. Quarterly.2 Includes retail, professional and other clients.


Aggregated income statement. Broker-dealers TABLE 2.7

2010 2011

Thousand euro1 2008 2009 2010 III IV I II III2

I. Interest income 109,682 163,272 102,054 79,231 102,054 15,186 52,973 72,762

II. Net commission 674,204 562,082 533,858 391,165 533,858 157,082 275,520 309,994

Commission revenues 943,619 782,214 798,152 593,521 798,152 231,177 419,375 477,001

Brokering 648,036 548,362 555,207 420,088 555,207 166,934 285,047 320,745

Placement and underwriting 42,502 26,326 8,499 4,314 8,499 1,057 2,830 3,279

Securities deposit and recording 21,198 16,183 22,367 16,775 22,367 5,465 10,887 12,565

Portfolio management 17,306 11,768 13,880 10,044 13,880 4,180 7,911 9,204

Design and advising 56,671 60,477 53,722 38,344 53,722 16,802 39,550 43,337

Stocks search and placement 12 10 36 36 36 179 184 334

Market credit transactions 19 14 9 8 9 2 4 5

IICs3 marketing 91,167 63,341 65,487 48,242 65,487 16,053 31,359 36,352

Other 66,708 55,733 78,944 55,672 78,944 20,503 41,601 51,180

Commission expenses 269,415 220,133 264,294 202,356 264,294 74,095 143,855 167,007

III. Financial investment income 800,194 45,266 48,588 9,841 48,588 28,085 38,782 9,846

IV. Net exchange differences and other

operating products and expenses -626,527 21,820 26,081 39,867 26,081 2,089 -5,173 13,619

V. Gross income 957,553 792,440 710,580 520,104 710,580 202,442 362,102 406,221

VI. Operating income 434,209 339,706 276,253 197,788 276,253 88,668 142,774 150,280

VII. Earnings from continuous activities 365,374 250,984 196,834 173,280 196,834 73,044 121,402 127,599

VIII. Net earnings of the period 367,665 250,984 196,834 173,280 196,834 73,044 121,402 127,599

1 Accumulated data from the beginning of the year to the last day of every quarter. It includes companies removed throughout the year.2 Available data: July 2011.3 IIC: Instituciones de Inversión Colectiva / CIS: Collective Investment Schemes.

Results of proprietary trading. Broker-dealers TABLE 2.8

Interest incomeFinancial

investment income

Exchange differences

and other items Total

Thousand euro1 II 2010 II 2011 II 2010 II 2011 II 2010 II 2011 II 2010 II 2011

Total 43,915 52,973 76,990 38,783 -33,338 -6,521 87,568 85,235

Money market assets and public debt 2,376 967 4,080 5,670 – – 6,456 6,637

Other fixed-income securities 9,514 13,963 34,660 14,860 – – 44,174 28,823

Domestic portfolio 8,737 12,437 31,708 10,599 – – 40,445 23,036

Foreign portfolio 777 1,526 2,952 4,261 – – 3,729 5,786

Equities 34,049 30,269 -53,586 -128,191 – – -19,537 -97,922

Domestic portfolio 24,238 20,501 -81,483 35,292 – – -57,245 55,793

Foreign portfolio 9,811 9,768 27,898 -163,483 – – 37,709 -153,716

Derivatives – – 64,524 140,562 – – 64,524 140,562

Repurchase agreements -1,115 346 – – – – -1,115 346

Market credit transactions 0 0 – – – – 0 0

Deposits and other transactions with financial

intermediaries

-1,222 8,379 – – – – -1,222 8,379

Net exchange differences – – – – -38,210 -5,344 -38,210 -5,344

Other operating products and expenses – – – – 1,437 170 1,437 170

Other transactions 313 -951 27,312 5,881 3,435 -1,347 31,061 3,583

1 Accumulated data from the beginning of the year to the last day of every quarter. It includes companies removed throughout the year.


Aggregated income statement. Brokers TABLE 2.9

2010 2011


I. Interest income 7,980 2,652 1,629 1,099 1,629 351 1,144 1,263



Brokering 62,345 53,988 38,176 29,565 38,176 10,080 19,345 22,250

Placement and underwriting 4,847 2,989 2,748 1,368 2,748 350 1,181 1,360

Securities deposit and recording 676 509 366 276 366 97 191 225


Design and advising 4,962 2,806 3,618 1,972 3,618 1,147 2,634 3,211

Stocks search and placement 0 0 304 128 304 174 538 616

Market credit transactions 10 28 27 26 27 10 13 14

IICs3 marketing 31,287 23,966 23,946 17,611 23,946 5,828 11,097 12,777

Other 47,081 40,453 37,381 27,816 37,381 8,294 16,141 18,959


III. Financial investment income -1,176 1,709 456 23 456 151 -54 -10


operating products and expenses 3,526 -1,111 -1,416 -955 -1,416 -455 -1,306 -1,354

V. Gross income 160,204 130,661 109,834 80,400 109,834 26,095 50,207 58,125

VI. Operating income 20,377 9,090 9,457 6,330 9,457 3,444 5,568 6,199

VII. Earnings from continuous activities 14,372 4,862 6,452 5,700 6,452 3,298 5,289 5,830

VIII. Net earnings of the period 14,372 4,862 6,452 5,700 6,452 3,298 5,289 5,830


Aggregated income statement. Portfolio management companies TABLE 2.10

2010 2011


I. Interest income 1,482 341 407 274 407 154 293 359




Design and advising 2,484 2,698 1,160 1,101 1,160 307 800 952

IICs3 marketing 66 18 34 34 34 0 0 0

Other 644 571 1,779 1,779 1,779 0 0 0


III. Financial investment income -108 92 51 96 51 243 233 217


operating products and expenses -418 -383 21 -265 21 13 -19 -20

V. Gross income 13,000 10,784 10,577 8,497 10,577 2,307 4,347 5,022

VI. Operating income 1,157 1,296 1,154 1,189 1,154 415 677 739

VII. Earnings from continuous activities 765 889 939 1,009 939 304 490 534

VIII. Net earnings of the period 765 889 939 1,009 939 304 490 534



Surplus equity over capital adequacy requirements1 TABLE 2.11

Surplus Number of companies according to its surplus percentage

Thousand euroTotal

amount %2 < 50 < 100 < 150 < 200 < 300 < 400 < 500 < 750 < 1000 > 1000

Total 1,527,805 366.38 9 18 12 8 15 9 7 12 5 6

Broker-dealers 1,441,784 393.82 3 5 1 2 12 7 6 7 4 3

Brokers 69,503 198.11 5 11 11 5 3 1 1 5 1 2

Portfolio management companies 16,518 104.43 1 2 0 1 0 1 0 0 0 1

1 Available data: June 2011. 2 Average percentage is weighted by the required equity of each company. It is an indicator of the number of times, in percentage terms, that the surplus contains

the required equity in an average company.

Return on equity (ROE) before taxes1,2 TABLE 2.12

Average3 Losses

Number of companies according to its annualised return

0-5% 6-15% 16-30% 31-45% 46-60% 61-75% 76-100% > 100%

Total 14.99 30 18 25 11 6 4 1 1 5

Broker-dealers 15.40 13 11 11 9 2 1 0 0 3

Brokers 10.66 16 5 12 2 3 3 1 1 2

Portfolio management companies 4.19 1 2 2 0 1 0 0 0 0

1 ROE has been calculated as:

ROE = Profit before taxes (annualised)

Equity Own_Funds= Share capital + Paid-in surplus + Reserves – Own shares + Prior year profits and retained earnings – Interim dividend.2 Available data: June 2011. 3 Average weighted by equity, %.

Financial advisory firms. Main figures TABLE 2.13

2009 2010 2011Thousand euro 2008 2009 2010 II I II IASSETS ADVISED1

Total – 1,410,985 16,120,751 1,410,985 11,929,643 16,120,751 16,968,190 Retail clients – 364,284 1,707,278 364,284 1,164,130 1,707,278 2,090,669 Professional – 1,046,702 14,321,020 1,046,702 10,746,313 14,321,020 14,786,650 Other – 0 92,453 0 19,200 92,453 90,871COMMISSION INCOME2 Total – 3,183 21,863 3,183 7,783 21,863 14,113 Commission revenues – 3,183 21,747 3,183 7,726 21,747 14,077 Other income – 0 116 0 57 116 36EQUITY Total – 1,500 10,224 1,500 9,312 10,224 10,363 Share capital – 1,043 3,014 1,043 2,379 3,014 3,386 Reserves and retained earnings – 36 384 36 3,333 384 2,808 Income for the year2 – 421 6,826 421 3,600 6,826 4,1691 Data at the end of each period. Half-yearly.2 Accumulated data from the beginning of the year to the last day of every semester.


3 Collective investment schemes (IICs)a,b

Number, management companies and depositories of collective investment schemes TABLE 3.1

registered at the CNMV

2010 20112008 2009 2010 III IV I II III1

Total financial IICs 6,354 5,892 5,627 5,679 5,627 5,603 5,551 5,498 Mutual funds 2,943 2,593 2,429 2,443 2,429 2,436 2,410 2,370 Investment companies 3,347 3,232 3,133 3,171 3,133 3,105 3,077 3,064 Funds of hedge funds 40 38 32 33 32 29 28 28 Hedge funds 24 29 33 33 33 33 36 36Total real estate IICs 18 16 16 16 16 16 16 15 Real estate investment funds 9 8 8 8 8 8 8 7 Real estate investment companies 9 8 8 8 8 8 8 8Total foreign IICs marketed in Spain 563 582 660 652 660 669 695 697 Foreign funds marketed in Spain 312 324 379 376 379 383 395 395 Foreign companies marketed in Spain 251 258 281 276 281 286 300 302IIC Management companies 120 120 123 123 123 120 118 117IIC Depositories 125 124 114 117 114 113 107 1021 Available data: August 2011.

Number of IICs investors and shareholders TABLE 3.2

2010 20112008 2009 20101 II III IV I II1

Total financial IICs 6,358,753 5,895,009 5,578,524 5,841,721 5,765,250 5,578,524 5,575,859 5,460,738 Mutual funds 5,923,352 5,475,403 5,160,889 5,423,206 5,348,536 5,160,889 5,160,482 5,044,106 Investment companies 435,401 419,606 417,635 419,307 416,714 417,635 415,377 416,632Total real estate IICs 98,327 84,511 76,223 77,714 77,116 76,223 34,690 32,906 Real estate investment funds 97,390 83,583 75,280 76,772 76,182 75,280 33,747 31,963 Real estate investment companies 937 928 943 942 934 943 943 943Total foreign IICs marketed in Spain2 593,488 685,094 865,767 791,381 811,553 865,767 855,877 856,882 Foreign funds marketed in Spain 102,922 139,102 193,233 181,039 186,804 193,233 197,965 195,525 Foreign companies marketed in Spain 490,566 545,992 666,534 610,342 624,749 666,534 657,912 661,3571 Provisional data for foreign IICs.2 Exchange traded funds (ETFs) data is not included.

IICs total net assets TABLE 3.3

2010 2011Million euro 2008 2009 20101 II III IV I II1

Total financial IICs 200,522.4 196,472.5 170,073.1 180,899.1 178,778.0 170,073.1 170,409.6 166,446.6 Mutual funds2 175,865.5 170,547.7 143,918.2 155,295.5 152,646.5 143,918.2 144,428.0 140,351.3 Investment companies 24,656.9 25,924.8 26,155.0 25,602.6 26,131.5 26,155.0 26,491.4 26,095.4Total real estate IICs 7,778.8 6,773.7 6,437.5 6,606.6 6,524.2 6,437.5 6,403.6 6,313.7 Real estate investment funds 7,406.9 6,465.1 6,115.6 6,279.6 6,201.5 6,115.6 6,083.3 5,995.5 Real estate investment companies 371.9 308.6 321.9 327.0 322.7 321.9 320.3 318.2Total foreign IICs marketed in Spain3 18,254.8 25,207.2 36,692.9 32,362.8 32,826.7 36,692.9 37,636.4 35,582.2 Foreign funds marketed in Spain 3,352.0 5,215.1 8,535.9 7,477.2 7,650.1 8,535.9 8,092.4 7,303.2 Foreign companies marketed in Spain 14,902.8 19,992.0 28,156.9 24,885.7 25,176.6 28,156.9 29,544.0 28,279.01 Provisional data for foreign IICs. 2 For June 2011, mutual funds investments in financial IICs reached 6.2 billion euro.3 Exchange traded funds (ETFs) data is not included.

a IICs: Instituciones de Inversión Colectiva / CIS: Collective Investment Schemes.

b In this document, neither hedge funds nor funds of hedge funds are included in the figures referred to mutual funds.


Mutual funds asset allocation1 TABLE 3.4

2010 2011

Million euro 2008 2009 2010 II III IV I II2

Asset 175,865.5 170,547.7 143,918.1 155,295.5 152,646.5 143,918.2 144,428.0 140,351.3

Portfolio investment 166,384.7 163,165.5 137,295.4 148,166.2 144,724.4 137,296.1 137,441.4 133,666.7

Domestic securities 107,347.7 100,642.6 89,630.2 92,605.7 91,413.1 89,632.4 92,205.1 91,324.1

Debt securities 81,904.6 74,628.9 68,575.1 69,173.9 68,366.9 68,574.5 71,784.6 70,905.2

Shares 4,023.2 4,741.0 3,829.2 3,611.2 3,994.8 3,829.2 3,990.3 3,944.8

Investment collective schemes 10,134.3 9,041.5 7,338.6 8,876.9 8,415.2 7,338.6 6,338.7 6,387.3

Deposits in Credit institutions 10,657.6 11,552.2 9,460.8 10,508.4 10,167.6 9,460.8 9,634.7 9,665.8

Derivatives 627.9 679.0 426.2 435.3 467.6 429.0 456.5 420.9

Other 0.1 0.0 0.4 0.0 1.0 0.4 0.3 0.0

Foreign securities 59,035.2 62,487.1 47,626.5 55,515.6 53,272.4 47,625.1 45,198.9 42,329.6

Debt securities 49,659.8 48,435.3 30,337.4 39,619.4 36,499.7 30,337.4 26,875.7 24,575.4

Shares 5,216.1 7,783.2 8,385.8 7,615.6 8,003.2 8,386.4 8,604.6 8,758.1


Deposits in Credit institutions 17.5 82.4 108.0 81.5 73.1 108.0 86.7 61.2

Derivatives 599.5 518.7 387.1 349.2 427.4 385.1 376.5 384.2

Other 17.8 1.1 3.6 5.0 4.1 3.6 3.3 2.4

Doubtful assets and matured investment 1.8 35.8 38.6 44.9 38.9 38.6 37.4 12.2

Intangible assets 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Net fixed assets 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Cash 8,703.2 7,267.7 6,531.4 6,817.4 7,933.3 6,531.3 6,876.8 6,459.0

Net balance (Debtors - Creditors) 777.7 114.5 91.4 311.9 -11.2 90.7 109.8 225.5

1 Hedge funds and funds of hedge funds are not included in these figures due to the entry into force, on 31 December 2008, of Circular CR CNMV 3/2008 which esta-blishes a different deadline in reporting accounting information to CNMV.

2 Provisional data.

Investment companies asset allocation TABLE 3.5

2010 2011

Million euro 2008 2009 2010 II III IV I II1

Asset 24,656.9 25,924.8 26,155.0 25,602.6 26,131.5 26,155.0 26,491.4 26,095.4

Portfolio investment 23,446.9 24,813.5 25,187.3 24,471.5 25,015.5 25,187.1 25,262.0 24,915.3

Domestic securities 16,176.3 13,514.3 12,881.4 12,390.0 13,035.9 12,880.2 12,864.2 12,848.4

Debt securities 10,435.1 7,400.5 5,435.9 5,840.4 5,717.5 5,435.9 5,870.6 6,628.9

Shares 3,214.9 3,376.3 2,988.6 2,754.0 2,945.3 2,989.5 3,033.8 2,993.4

Investment collective schemes 1,108.8 1,091.1 758.7 831.9 806.5 756.5 801.9 816.0

Deposits in Credit institutions 1,383.5 1,631.5 3,675.2 2,963.0 3,546.8 3,675.2 3,133.2 2,381.5

Derivatives 9.8 -6.6 -5.9 -22.4 -5.8 -5.9 -4.9 -2.1

Other 24.4 21.7 29.0 23.1 25.7 29.0 29.6 30.6

Foreign securities 7,267.8 11,294.2 12,298.1 12,075.1 11,971.9 12,300.0 12,390.9 12,060.7

Debt securities 2,609.6 4,606.6 3,606.8 4,340.4 4,001.8 3,606.8 3,407.6 3,241.5

Shares 2,014.6 3,559.3 4,166.0 3,793.3 3,852.6 4,166.0 4,381.9 4,264.5


Deposits in Credit institutions 28.9 26.3 12.1 18.0 44.5 12.1 47.1 45.4

Derivatives 120.5 113.0 119.9 108.3 134.9 119.7 135.1 157.8

Other 7.8 1.6 2.8 8.0 4.3 2.8 4.2 2.4

Doubtful assets and matured investment 2.8 4.9 7.9 6.4 7.7 6.9 6.9 6.3

Intangible assets 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Net fixed assets 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2

Cash 1,021.0 976.4 832.0 896.0 903.3 832.1 1,014.6 946.9

Net balance (Debtors - Creditors) 188.8 134.8 135.5 235.0 212.6 135.6 214.6 233.0

1 Provisional data.


Financial mutual funds: Number, investors and total net assets by category1 TABLE 3.6

2010 2011

2008 2009 2010 II III IV I II

NO. OF FUNDS

Total financial mutual funds 2,912 2,536 2,408 2,436 2,421 2,408 2,417 2,389

Fixed-income2 629 582 537 547 540 537 543 530

Mixed fixed-income3 195 169 160 168 162 160 158 152

Mixed equity4 202 165 138 143 140 138 136 132

Euro equity5 237 182 172 179 174 172 171 157

Foreign equity6 330 242 232 233 233 232 222 222

Guaranteed fixed-income 260 233 276 251 261 276 303 324

Guaranteed equity7 590 561 499 530 518 499 485 470

Global funds 469 187 192 181 189 192 197 203

Passive management8 – 69 61 64 61 61 61 57

Absolute return8 – 146 141 140 143 141 141 142

INVESTORS

Total financial mutual funds 5,923,346 5,475,403 5,160,889 5,423,206 5,348,536 5,160,889 5,160,482 5,044,106

Fixed-income2 2,204,652 2,041,487 1,622,664 1,865,575 1,745,375 1,622,664 1,525,292 1,466,938

Mixed fixed-income3 277,629 290,151 270,341 295,325 280,230 270,341 251,992 238,275

Mixed equity4 209,782 182,542 171,336 185,111 182,860 171,336 162,861 156,631

Euro equity5 377,545 299,353 266,395 280,529 280,573 266,395 253,365 248,355

Foreign equity6 467,691 458,097 501,138 487,813 502,491 501,138 493,052 493,057

Guaranteed fixed-income 538,799 570,963 790,081 690,600 762,369 790,081 967,561 990,997

Guaranteed equity7 1,402,948 1,188,304 1,065,426 1,142,072 1,115,180 1,065,426 1,027,392 981,572

Global funds 444,300 88,337 105,720 99,163 110,538 105,720 114,244 124,088

Passive management8 – 85,403 90,343 97,949 93,049 90,343 85,254 82,371

Absolute return8 – 270,766 277,445 279,069 275,871 277,445 279,469 261,822

TOTAL NET ASSETS (million euro)

Total financial mutual funds 175,865.2 170,547.7 143,918.2 155,295.5 152,646.5 143,918.2 144,428.0 140,351.3

Fixed-income2 92,813.1 84,657.2 56,614.6 69,654.5 64,102.1 56,614.6 51,565.6 49,449.9

Mixed fixed-income3 5,803.0 8,695.5 7,319.0 8,264.2 8,109.9 7,319.0 6,570.0 6,251.9

Mixed equity4 3,958.8 3,879.6 3,470.5 3,441.5 3,520.2 3,470.5 3,484.5 3,345.6

Euro equity5 5,936.9 6,321.6 5,356.8 5,181.2 5,504.4 5,356.8 5,656.3 5,687.2

Foreign equity6 4,256.6 5,902.4 8,037.3 6,682.5 7,203.6 8,037.3 7,896.1 7,751.6

Guaranteed fixed-income 21,281.6 21,033.4 26,180.2 23,520.3 25,795.6 26,180.2 32,084.4 32,742.1

Guaranteed equity7 30,742.4 25,665.8 22,046.5 23,981.7 23,600.0 22,046.5 21,181.6 19,827.6

Global funds 11,072.8 3,872.5 4,440.3 3,991.1 4,093.9 4,440.3 5,481.7 5,718.1

Passive management8 – 3,216.6 2,104.8 2,350.2 2,323.6 2,104.8 2,193.0 2,172.2

Absolute return8 – 7,303.0 8,348.1 8,228.4 8,393.2 8,348.1 8,314.8 7,405.1

1 Mutual funds which have sent reports to the CNMV, excluding those in process of dissolution or liquidation.2 Until I 2009 this category includes: Short-term fixed income, Long-term fixed income, Foreign fixed-income and Monetary market funds. From II 2009 on includes:

Fixed income euro, Foreign fixed-income and Monetary market funds. Until December 2006 it included FIAMM.3 Until I 2009 this category includes: Mixed fixed-income and Foreign mixed fixed-income. From II 2009 on includes: Mixed euro fixed-income and Foreign mixed

fixed-income.4 Until I 2009 this category includes: Mixed equity and Foreign mixed equity. From II 2009 on includes: Mixed euro equity and Foreign mixed equity.5 Until I 2009 this category includes: Spanish equity and Euro Equity. From II 2009 on includes: Euro equity (which includes domestic equity).6 Until I 2009 this category includes: Foreign equity Europe, Foreign equity Japan, Foreign equity USA, Foreign equity emerging countries and Other foreign equity.

From II 2009 on includes: Foreign equity.7 Until I 2009 this category includes: Guaranteed equity. From II 2009 on includes: Guaranteed equity and partial guarantee.8 New categories from II 2009 on. Before it, absolute return funds were classified as Global funds.


Financial mutual funds: Detail of investors and total net assets by type of investors TABLE 3.7

2010 2011

2008 2009 2010 II III IV I II

INVESTORS

Total financial mutual funds 5,923,352 5,475,403 5,160,889 5,423,206 5,348,536 5,160,889 5,160,482 5,044,106

Individuals 5,754,049 5,322,214 5,019,902 5,272,045 5,201,334 5,019,902 5,020,705 4,907,283

Residents 5,677,123 5,252,126 4,954,891 5,203,616 5,134,719 4,954,891 4,955,440 4,843,565

Non-residents 76,926 70,088 65,011 68,429 66,615 65,011 65,265 63,718

Legal entities 169,303 153,189 140,987 151,161 147,202 140,987 139,777 136,823

Credit institutions 1,713 674 524 582 568 524 500 491

Other resident institutions 166,041 151,479 139,550 149,581 145,690 139,550 138,402 135,505

Non-resident institutions 1,549 1,036 913 998 944 913 875 827

TOTAL NET ASSETS (million euro)


Individuals 135,756.2 132,860.5 113,660.6 121,762.4 119,808.3 113,660.6 115,233.0 111,732.9

Residents 133,878.1 130,954.4 111,900.1 119,898.1 117,961.2 111,900.1 113,442.6 110,123.1

Non-residents 1,878.1 1,906.0 1,760.5 1,864.3 1,847.1 1,760.5 1,790.3 1,609.9

Legal entities 40,109.3 37,687.2 30,257.5 33,533.9 32,838.1 30,257.5 29,195.0 28,618.3

Credit institutions 4,193.0 2,572.0 1,926.1 2,145.0 2,152.9 1,926.1 1,869.9 1,854.3

Other resident institutions 34,738.0 34,065.1 27,644.6 30,614.8 29,926.8 27,644.6 26,666.9 26,205.8

Non-resident institutions 1,178.4 1,050.1 686.9 774.1 758.5 686.9 658.2 558.3

Subscriptions and redemptions of financial mutual funds by category1 TABLE 3.8

2010 2011

Million euro 2008 20092 2010 II III IV I II

SUBSCRIPTIONS


Fixed-income 101,909.7 73,718.8 41,656.1 13,605.3 6,206.7 6,603.3 7,890.1 6,478.3

Mixed fixed-income 1,914.5 5,267.6 3,538.8 1,082.2 571.7 641.4 358.0 517.3

Mixed equity 1,350.2 1,135.4 1,221.7 556.5 118.5 254.6 270.4 345.6

Euro equity 2,858.0 2,183.8 1,673.0 464.0 291.1 335.4 575.2 524.1

Foreign equity 3,309.6 2,929.5 4,455.2 1,190.3 778.5 1,227.3 2,488.7 721.4


Guaranteed equity 6,544.7 5,589.1 5,120.1 1,539.4 726.8 1,246.5 828.6 622.0

Global funds 5,638.0 2,754.4 3,018.1 440.6 265.4 1,767.1 1,534.3 838.6

Passive management – 535.5 683.8 271.1 73.7 96.4 220.5 149.2

Absolute return – 4,045.7 5,924.8 1,778.8 959.1 1,333.6 1,165.9 382.4

REDEMPTIONS


Fixed-income 124,242.9 81,197.6 68,806.1 22,951.2 12,006.3 13,908.1 13,298.5 8,737.2

Mixed fixed-income 8,136.6 2,724.4 4,955.7 1,653.8 812.4 1,383.5 1,138.4 892.1

Mixed equity 4,675.6 1,596.5 1,311.8 601.2 168.0 316.9 267.4 446.3

Euro equity 8,617.2 2,457.8 2,369.9 673.9 452.4 534.0 594.8 453.7

Foreign equity 8,657.3 2,165.3 3,303.3 991.1 625.5 981.8 2,521.1 800.6


Guaranteed equity 18,216.4 10,990.8 7,620.2 1,852.4 1,399.8 2,550.0 1,624.7 1,717.3

Global funds 20,819.0 2,548.6 2,694.4 461.1 382.9 1,581.1 507.0 601.0

Passive management – 708.0 1,474.1 682.1 141.6 254.2 236.7 108.3

Absolute return – 3,224.0 5,053.0 1,645.3 1,039.3 1,349.5 1,332.4 1,289.5

1 Estimated data.2 For Passive Management and Absolute return, data refers to the last three quarters of the year.


Financial mutual funds asset change by category: Net subscriptions/redemptions TABLE 3.9

and return on assets

2010 2011

Million euro 2008 20091 2010 II III IV I II

NET SUBSCRIPTIONS/REDEMPTIONS

Total financial mutual funds -67,402.4 -12,702.3 -25,580.6 -9,124.0 -5,056.0 -8,607.1 -765.2 -4,121.9

Fixed-income -22,333.2 -7,478.8 -27,149.9 -9,531.5 -5,962.0 -7,266.9 -5,379.3 -2,280.5

Mixed fixed-income -6,222.1 2,543.2 -1,417.0 -566.2 -302.3 -746.8 -814.4 -323.8

Mixed equity -3,325.4 -461.1 -90.0 -106.5 -79.4 -75.8 -61.2 -128.4

Euro equity -5,759.2 -274.0 -696.9 -210.4 -185.9 -206.2 -16.4 59.0

Foreign equity -5,347.7 764.2 1,152.1 183.9 178.3 255.5 -61.8 -45.7

Guaranteed fixed-income 2,437.9 -3,249.1 4,716.0 1,761.1 2,045.5 712.1 5,631.2 531.1

Guaranteed equity -11,671.7 -5,401.7 -2,500.1 -376.7 -648.1 -1,238.0 -1,016.9 -1,288.1

Global funds -15,181.0 205.8 323.6 -8.2 -6.6 266.4 997.6 247.1

Passive management – -172.5 -790.3 -387.0 -160.3 -219.6 -11.6 -10.8

Absolute return – 821.7 871.7 117.4 64.6 -87.7 -52.6 -881.9

RETURN ON ASSETS

Total financial mutual funds -11,988.0 8,389.8 135.7 -3,097.1 2,418.2 -115.4 1,280.9 47.2

Fixed-income 1,927.7 1,535.3 64.5 -486.4 409.7 -218.4 330.4 164.9

Mixed fixed-income -716.8 507.9 -56.4 -194.3 148.0 -44.2 65.4 5.6

Mixed equity -1,589.0 529.9 -53.4 -227.6 158.1 29.1 75.2 -10.5

Euro equity -5,172.6 1,477.1 -254.1 -638.6 509.2 59.6 319.2 -26.9

Foreign equity -4,092.4 1,309.0 877.4 -390.0 342.8 578.2 -79.3 -98.8

Guaranteed fixed-income 597.6 830.5 -170.4 -286.3 229.7 -327.4 273.0 127.2

Guaranteed equity -1,310.4 1,024.0 -392.8 -438.4 266.4 -315.5 151.9 -65.8

Global funds -1,632.1 272.2 123.1 -121.9 109.4 80.0 43.8 -10.7

Passive management – 657.8 -109.7 -205.1 144.7 3.5 81.9 -9.9

Absolute return – 246.4 107.7 -108.4 100.2 42.6 19.3 -27.9

1 The data refers to the last three quarters of the year for Passive Management and Absolute return categories.


Financial mutual funds return on assets. Detail by category TABLE 3.10

2010 2011

% of daily average total net assets 2008 20091 2010 II III IV I II

MANAGEMENT YIELDSTotal financial mutual funds -4.09 6.13 1.09 -1.67 1.82 0.17 0.89 0.27

Fixed-income 2.53 2.69 0.78 -0.47 0.81 -0.18 0.62 0.51

Mixed fixed-income -5.75 9.34 0.61 -1.94 2.13 -0.25 0.95 0.41

Mixed equity -23.30 16.44 0.11 -5.96 4.95 1.19 2.16 0.16

Euro equity -47.02 31.02 -3.05 -10.85 9.84 1.62 5.73 0.15

Foreign equity -49.55 33.16 14.8 -5.08 5.48 8.11 -0.98 -0.67


Guaranteed equity -1.88 5.08 -0.46 -1.50 1.44 -1.07 0.71 0.01

Global funds -7.36 10.82 4.15 -2.67 2.97 2.17 0.88 0.13

Passive management – – -2.50 -7.34 6.43 0.41 3.74 -0.21

Absolute return – – 2.49 -1.04 1.48 0.8 0.23 -0.07

EXPENSES. MANAGEMENT FEE Total financial mutual funds 0.87 0.87 0.91 0.22 0.23 0.24 0.23 0.23

Fixed-income 0.58 0.63 0.65 0.16 0.16 0.16 0.16 0.16

Mixed fixed-income 1.14 1.14 1.20 0.29 0.30 0.30 0.29 0.29

Mixed equity 1.54 1.58 1.65 0.39 0.41 0.41 0.40 0.39

Euro equity 1.60 1.75 1.78 0.43 0.45 0.45 0.44 0.44

Foreign equity 1.69 1.79 1.84 0.42 0.45 0.50 0.44 0.43

Guaranteed fixed-income 0.49 0.65 0.62 0.15 0.16 0.17 0.16 0.18

Guaranteed equity 1.29 1.26 1.24 0.30 0.30 0.31 0.30 0.30

Global funds 1.04 1.08 1.06 0.22 0.27 0.30 0.29 0.27

Passive management – – 0.72 0.16 0.18 0.19 0.19 0.18

Absolute return – – 1.06 0.25 0.26 0.28 0.29 0.26

EXPENSES. DEPOSITORY FEE

Total financial mutual funds 0.08 0.09 0.09 0.02 0.02 0.02 0.02 0.02

Fixed-income 0.08 0.08 0.08 0.02 0.02 0.02 0.02 0.02

Mixed fixed-income 0.09 0.09 0.10 0.02 0.03 0.03 0.03 0.03

Mixed equity 0.11 0.10 0.12 0.03 0.03 0.03 0.03 0.03

Euro equity 0.10 0.10 0.11 0.03 0.03 0.03 0.03 0.03

Foreign equity 0.12 0.12 0.12 0.03 0.03 0.03 0.03 0.03

Guaranteed fixed-income 0.07 0.08 0.07 0.02 0.02 0.02 0.02 0.02

Guaranteed equity 0.11 0.11 0.10 0.02 0.02 0.03 0.02 0.02

Global funds 0.09 0.08 0.09 0.02 0.02 0.02 0.02 0.02

Passive management – – 0.07 0.02 0.02 0.02 0.02 0.02

Absolute return – – 0.08 0.02 0.02 0.02 0.02 0.02

1 Passive management and absolute annual returns are not included because they are new categories from II 2009 on.

Mutual funds quarterly returns. Detail by category TABLE 3.11

2010 2011

In % 2008 20091 2010 II III IV I IITotal financial mutual funds -4.21 5.73 0.35 -1.83 1.64 -0.04 0.95 0.03

Fixed-income 2.06 1.91 0.11 -0.62 0.63 -0.35 0.63 0.33

Mixed fixed-income -7.14 6.85 -0.54 -2.18 1.82 -0.56 0.9 0.09

Mixed equity -22.21 16.47 -0.98 -6.00 4.67 0.78 2.23 -0.31

Euro equity -39.78 32.41 -2.94 -10.66 10.11 1.27 6.11 -0.45

Foreign equity -41.71 37.28 14.22 -4.97 5.35 8.01 -0.49 -1.15


Guaranteed equity -2.61 3.56 -1.79 -1.91 1.20 -1.45 0.71 -0.48

Global funds -8.64 10.90 3.22 -2.82 2.80 1.87 0.98 -0.14

Passive management – – -2.36 -7.28 6.32 0.31 3.74 -0.30

Absolute return – – 1.53 -1.19 1.17 0.58 0.28 -0.35

1 Passive management and absolute annual returns are not included because they are new categories from II 2009 on.


Hedge funds and funds of hedge funds TABLE 3.12

2010 2011

2008 2009 2010 II III IV I II1

HEDGE FUNDS

Investors/shareholders 1,589 1,917 1,852 2,061 1,925 1,852 1,958 1,984

Total net assets (million euro) 539.4 652.0 646.2 674.1 639.3 646.2 693.5 719.0

Subscriptions (million euro) 390.4 248.7 236.6 76.0 21.2 31.0 56.0 24.9

Redemptions (million euro) 258.3 198.3 268.6 99.2 73.2 42.6 20.2 18.9

Net subscriptions/redemptions (million euro) 132.7 50.4 -32.0 -23.2 -52.1 -11.6 35.9 6.0

Return on assets (million euro) -39.1 62.2 26.3 -25.1 17.4 18.4 11.5 7.7

Returns (%) -4.82 14.94 5.37 -3.17 2.97 3.11 1.79 1.18

Management yields (%)2 -2.51 13.76 6.33 -3.25 3.24 3.45 2.38 1.50

Management fee (%)2 2.50 2.55 1.91 0.35 0.47 0.49 0.48 0.29

Financial expenses (%)2 0.16 0.11 0.07 0.02 0.02 0.02 0.02 0.02

FUNDS OF HEDGE FUNDS

Investors/shareholders 8,516 5,321 4,404 5,109 4,901 4,404 4,240 4,181

Total net assets (million euro) 1,021.3 810.2 694.9 738.0 726.8 694.9 667.2 650.3

Subscriptions (million euro) 967.3 302.4 47.9 2.2 13.9 10.4 2.3 –

Redemptions (million euro) 700.9 585.4 184.8 52.8 23.7 57.2 29.9 –

Net subscriptions/redemptions (million euro) 266.4 -283.0 -136.9 -50.6 -9.8 -46.8 -27.6 –

Return on assets (million euro) -245.7 71.9 21.7 -5.3 -1.3 14.9 -0.1 –

Returns (%) -17.8 7.85 3.15 -0.61 -0.1 2.13 -0.01 -0.03

Management yields (%)3 -17.84 11.54 4.38 -0.34 0.14 2.46 0.36 –

Management fee (%)3 1.63 1.34 1.25 0.30 0.31 0.32 0.31 –

Depository fee (%)3 0.11 0.11 0.08 0.02 0.02 0.02 0.02 –

1 Available data: May 2011. Return refers to the period March-May.2 % of monthly average total net assets.3 % of daily average total net assets.

Management companies. Number of portfolios and assets under management1 TABLE 3.13

2010 2011

2008 2009 2010 II III IV I II

NUMBER OF PORTFOLIOS

Mutual funds 2,943 2,593 2,429 2,443 2,429 2,436 2,410 2,381

Investment companies 3,240 3,135 3,068 3,096 3,068 3,059 3,024 3,014

Funds of hedge funds 40 38 32 33 32 29 28 28

Hedge funds 24 28 31 32 32 32 35 35

Real estate investment fund 9 8 8 8 8 8 8 7

Real estate investment companies 9 8 8 8 8 8 8 8

ASSETS UNDER MANAGEMENT (million euro)

Mutual funds 175,865.5 170,547.7 143,918.2 152,646.5 143,918.2 144,428.0 140,351.3 –

Investment companies 23,656.1 24,952.8 25,361.3 25,307.7 25,361.3 25,835.9 25,399.1 –

Funds of hedge funds3 1,021.3 810.2 709.2 726.8 694.9 667.2 650.3 –

Hedge funds3 539.4 652.0 614.5 635.5 643.5 666.3 690.6 –

Real estate investment fund 7,406.9 6,465.1 6,115.6 6,201.5 6,115.6 6,083.3 5,995.5 –

Real estate investment companies 371.9 308.5 321.9 322.7 321.9 320.3 318.2 –

1 From II quarter 2009 on it is considered as “assets under management” all the assets of the investment companies which are co-managed by management compa-nies and other different companies.

2 Available data: July 2011.3 Available data for II quarter 2011: May 2011.


Foreign Collective Investment Schemes marketed in Spain1 TABLE 3.14

2010 2011

2008 2009 2010 II III IV I II

INVESTMENT VOLUME3 (million euro)

Total 18,254.8 25,207.2 36,692.9 32,362.8 32,826.7 36,692.9 37,636.4 35,582.2

Mutual funds 3,352.0 5,215.1 8,535.9 7,477.2 7,650.1 8,535.9 8,092.4 7,303.2

Investment companies 14,902.8 19,992.0 28,156.9 24,885.7 25,176.6 28,156.9 29,544.0 28,279.0

INVESTORS/SHAREHOLDERS

Total 593,488 685,094 865,767 791,381 811,553 865,767 855,877 856,882

Mutual funds 102,922 139,102 193,233 181,039 186,804 193,233 197,965 195,525

Investment companies 490,566 545,992 666,534 610,342 624,749 666,534 657,912 661,357

NUMBER OF SCHEMES

Total 563 582 660 636 652 660 669 695

Mutual funds 312 324 379 365 376 379 383 395

Investment companies 251 258 281 271 276 281 286 300

COUNTRY

Luxembourg 274 275 290 288 287 290 292 298

France 161 178 225 210 222 225 229 239

Ireland 63 64 75 69 74 75 77 84

Germany 16 17 20 20 20 20 20 21

UK 14 14 16 15 15 16 17 19

The Netherlands 1 1 1 1 1 1 1 1

Austria 28 27 27 27 27 27 27 27

Belgium 5 5 5 5 5 5 5 5

Malta 1 1 1 1 1 1 1 1

1 Exchange traded funds (ETFs) data is not included.2 Provisional data.3 Investment volume: participations or shares owned by the investors/shareholders at the end of the period valued at that moment.

Real estate investment schemes1 TABLE 3.15

2010 2011

2008 2009 2010 III IV I II III2

REAL ESTATE MUTUAL FUNDS

Number 9 8 7 8 7 7 7 7

Investors 97,390 83,583 75,280 76,182 75,280 33,747 31,963 31,591

Assets (million euro) 7,406.9 6,465.1 6,115.6 6,201.5 6,115.6 6,083.3 5,995.5 5,983.0

Return on assets (%) 0.69 -8.31 -4.74 -1.31 -0.9 -0.66 -0.65 -0.23

REAL ESTATE INVESTMENT COMPANIES

Number 9 8 8 8 8 8 8 8

Shareholders 937 928 943 934 943 943 943 943

Asset (million euro) 371.9 308.6 321.9 322.7 321.9 320.3 318.2 317.0

1 Real estate investment schemes which have sent reports to the CNMV, excluding those in process of dissolution or liquidation.2 Available data: July 2011. In this case, return on assets is monthly.

CNMV BULLETINQuarter III

2011

Qu

arter III 2011

CN

MV

BU

LLET

IN

EN

CLOSED

CD

cnmv bulletin quarter iii 2011 · quarter iii/2011 13 1 executive summary • the pace of the world...

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